When you know where you’re going, it’s easier to get there. Right?
Before you go on a trip, you first plug the destination into your map app. Then you get turn-by-turn instructions from start to finish, which makes the journey a little easier. The same is true when you’re building a real estate investment portfolio. When you know your end goal, the path to accomplishing it becomes much clearer.
Follow the step-by-step guide below to start building a successful investment portfolio, no matter what type of property you choose or what the current market looks like.
Financing Your Properties
Financing choices have a domino effect on future purchases. If you approach a bank and say, “I want to buy 10 houses this year,” they can help you choose an option to make that happen.
But, if you just ask for one sizable loan to buy 10 houses, you won’t be able to sell those houses individually. Instead, you'll need to get out of the loan by refinancing each property.
TIP: Begin with the end in mind. The type of financing you choose for the first deal affects how you can buy and sell property later.
Setting Your Goals
Before you start buying up houses, ask yourself, “What do I want to accomplish?” How much do you want to make on your investment? Do you want monthly cash flow from rental properties, or are you looking to profit when you sell?
Maybe you want to make 10% cash-on-cash return from your investment. Or you want to make $50K per month in passive cash flow on your rentals. Once you know what type of profit you’re aiming for, you can create the plan.
Defining Your Strategy
Now it’s time to work backwards to figure out how to accomplish your goal.
- First, you’ll need to save money for your down payment(s). How many houses are you looking to buy and how much should you put down on each house to reach your goals?
- Then, find an insurance agent you trust who offers good rates.
- Finally, evaluate all the costs involved in a purchase. What’s the tax assessment? How much is insurance?
Now you need the right properties. For most investors, we recommend houses of less than 10 years old in subdivisions with community pools and parks. Also, research the school zone and employment rates in the area. The better the schools and the higher employment, the better renters you’ll get.
Avoid areas without regulations or HOAs. Otherwise, you may end up with situations like a neighbor parking their RV in their front yard and no way around it.
The best way to manage risks is to keep cash reserves for the unexpected. For houses of less than 10 years old, we recommend keeping 1% of the property value on hand.
TIP: As you’re buying homes, use a trusted real estate agent or have an attorney look over your contracts. Also, have properties thoroughly inspected. You don’t want surprises when it comes to working appliances or needed repairs.
Also, take time to look at the property survey before you buy. A survey shows you a bird's-eye view of the area. You’ll see specific property lines and any structure added to the property since it was last surveyed. For example, if someone built a shed on the property without getting it approved by the city, the city could come tear it down. A survey helps you catch this before you pay for an additional structure that won’t stay. You’ll also see any utilities or easements — like if the city owns a section of the property. Plus, you’ll know your exact property lines so there are no surprises about what land belongs to you.
To get the most from your investments, offer a good product. Make sure the property is in great condition. Why? A desirable tenant won’t move into something that needs work. The lowest-risk tenants have high credit scores, good jobs, and good rental history. And they can get approved for any house they apply for. So make sure your house is well maintained and “hotel” clean — great curb appeal, paint touched up, spotless bathrooms, secure fences, and a great AC.
Price it competitively too. Every day the house sits vacant on the market costs you money. How do you know if you overpriced your house? No showings. If your house isn't renting, check how many showings you have per week. If people aren’t coming to see the house, it’s too expensive. For example, say you can get $2,000 per month in rent. If you overprice it, you’re losing about $500 for every week it sits empty.
So be realistic with your price. Do your research and work with a property manager to find the maximum rent you can ask without losing money because you priced too high.
Then, either let your property manager keep up with tenants and property for you, or do it yourself.
Once the lease is signed, start looking for the next house. One house at a time, you’ll see your real estate investment portfolio grow.