There are numerous ways to invest in real estate. While some are aiming to achieve long-term wealth, others might want to develop a real estate portfolio to supplement their income. However, to achieve these goals, it’s essential to learn how to build a real estate investment portfolio.
What is a real estate investment portfolio?
A real estate investment portfolio is a collection of properties you have invested in to achieve your financial goals. Real estate portfolios are carefully planned out and consist of current and past deals which can include residential properties, rental properties, rehabs, or REITs. Every investor’s real estate portfolio is unique since their mix of properties and values are different. The investment assets chosen are purely based on financial goals and available funds (including financing).
How to start a real estate portfolio?
Real estate investments can yield great returns when done right. Those who have the means should definitely delve into real estate investing. For real estate investors, beginning heir real estate portfolio can be a struggle, especially if they don’t have the correct guidance. Knowing how begin your real estate investment portfolio and why it’s important is essential to your success. Your real estate portfolio paves the way for funding future deals as well. You will meet many people along your journey to building your real estate portfolio. Some of these individuals could be potential private lenders who can help with such deals. You therefore must have reports and marketing materials to show such lenders your potential to earn a high rate of return. A well thought out and maintained portfolio will showcase your personal investment goals and how successful you have been at achieving them. Your real estate portfolio also consists of your buying philosophy and testimonials from other lenders.
Your investment objective is basically the outcome you’re expecting from your investments. Preparing an asset portfolio is reverse engineering, you determine your goals, and then work backwards. You also need to realize that various investments perform differently during different periods, therefore, it’s essential to define your goals before choosing your assets. The combination of assets chosen and risk factors determine your overall yield of the portfolio. The types of assets on your real estate portfolio play a vital role in its success. Rental properties are known to provide a steady stream of income, while multifamily properties are known to diversify risk. Assets like rehabs can help with short-term gains.
Analyzing the numbers
Real estate portfolios depend on numbers. These numbers are the foundation of any investment. Every asset on your portfolio should be broken down into price, holding cost, repairs, sale price, and profit. This information will help you determine the best performing assets on your portfolio and helps you make better decisions for the future. Financing is an important aspect of a real estate portfolio. Very few individuals have the finances to purchase all the real estate assets they want, therefore, they need to get in touch with lenders. When real estate investments are done carefully, the portfolio is able to pay finance costs and earn a profit. Improvement costs are essential when it comes to real estate. When you own property, whether for rental income or capital gains, you need to incur repair and maintenance costs. Improvement costs also help upgrade the property for a better ROI. Recording these costs efficiently proves the associated costs of the portfolio, and the fact that you are able to leverage that money for a profit. Keep track of the repairs and improvements made to each property. Include the After Repair Values of the properties as well.
Determining the components of your real estate portfolio directly impacts its returns. Every real estate asset has an associated risk, your portfolio needs to be built in a way that minimizes risk and maximizes returns. Choosing the combination of assets to meet your goals is the most complicated part of building a portfolio. Since every investor has a different risk tolerance, no two portfolios, in essence, will be the same. Since risk and returns are directly correlated, a risk averse investor might have to settle for lower returns and safer investments.
Managing your real estate portfolio is something investors don’t put much thought into when they begin their journey. When holding onto multiple properties, you need to manage each one too. You could hire a professional to help you out, or dedicate time to do it yourself. Managing a real estate portfolio essentially means taking care of the properties, seeing to repairs, and planning improvements, all while keeping costs and profit in check.
Benefits of a real estate portfolio
Luckily, there are many tax benefits associated with owning property and building a rental property portfolio. Rental home expenses are tax-deductible, reducing your overall tax liability. Make sure you save all receipts and document transactions to avail these tax benefits. Tax deductions can be claimed on cleaning and maintenance, condo dues, advertising, insurance, mortgage interests, utilities, and even legal fees incurred.
The benefit of having rental properties on your portfolio is that you have a steady stream of cash inflows from your portfolio. These inflows can be used to make monthly payments to lenders, or to maintain properties, or even help you invest in more real estate. You can reap the benefits of rental income till you decide not to.
Mistakes to avoid
Effectively growing your portfolio consists of avoiding certain mistakes. Here are some examples:
Not diversifying your portfolio
Real estate investors can get too comfortable with investing in a particular type of property. They tend to buy many similar properties based on a track record of profitable investments including specific types of properties. However, failure to diversify your portfolio can be very risky. Always invest in a variety of properties to mitigate the risk.
Whether its costs of repairs or upgrade’s for your real estate investments, not planning them out effectively can lead to spending more than you earn from them. Never underestimate the costs associated with properties. When upgrading a property, make sure you have quotes from multiple contractors so that you can plan effectively. If you’re looking to add to your real estate portfolio, get in touch with Phillip Fehler. Phillip Fehler is a successful real estate agent in Fort Bragg who has been working under the banner of Fathom Realty. Fathom Realty is one of the first agent-run real estate brokerages. Known throughout the country, this real estate brokerage has a large network of agents. Get in touch with Phillip Fehler for a free home evaluation in Fayetteville, or call (910) 381-1341.