A real estate portfolio is a collection of all the assets that a property investor holds and manages to attain specific financial objectives. While investment portfolios differ from one investor to another, they are based on a relatively straightforward process, as we shall see in this article.
Step 1: Set clear goals
The purpose of building and maintaining a real estate portfolio is to help you attain your financial objectives, so it is crucial to define what they are.
Do you want to create a reliable alternative income source to help with bills, or do you want to build a business that will help you achieve total financial freedom?
While there’s no wrong answer to these questions will help you choose a practical approach. There are many ways to invest in real estate, like;
- Buy and hold, where you purchase a property, then rent it out for profit.
- Fix-and-flip, where you buy properties, renovate them and then sell for a profit.
- Real estate investment trusts (REITs) if you’re interested in a more passive income source
While you can implement two or more of these strategies simultaneously, it’s better to pick one to master if you’re a beginner. You can always diversify with time.
Step 2: Create an investment business plan
Once you’ve set goals for your portfolio and investment strategy, you need to develop a plan. It may seem like challenging work, but it is worth it.
A business plan will help you flesh out your specific short-term objectives and increase the likelihood that you’ll succeed. It includes the following key features.
Organizational structure
This addresses the way the business will be structured. It involves factors like
- Your legal structure: whether you’ll be running your enterprise as a business entity or sole proprietor
- Composition: this will address who you are and your role in the real estate investment process, along with summaries for your core members.
Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis
A swot analysis will help you determine your position in the real estate industry in contrast to your competitors. It is a comprehensive look at the attributes of your business that will help you succeed, along with those you need to improve.
Market analysis
Your market analysis will help demonstrate and improve your real estate market knowledge in your preferred areas. You’ll want to consider the following factors for your research.
Historical data: this can help you predict how a specific area will perform in the future
Neighborhood quality and amenities: amenities schools and shopping venues, public transport, and recreational facilities will affect property value. You’ll want a property that offers easy access to these facilities as it will be more profitable.
Property value estimates: Researching the average sale price per square foot for home sales will give you a reasonable estimate of what properties will cost.
A thorough market analysis will help you determine the most profitable homes and find offers suitable for your investment strategy. It will also help you know where you are in the real estate investment market cycle.
Financing strategy
This is the part where you determine the appropriate financing methods to grow your investment portfolio. It also includes a financial projection of your earnings for at least five years.
Growth strategy
You should have an idea of how to grow your enterprise. Having plans on how to grow your real estate investment business will show your business partners and potential investors that you are passionate about your enterprise and intend for it to succeed. On a more personal level, it will guide your investment decisions as your business matures.
Exit strategy
You will need to specify how you would remove yourself or exit a real estate deal if the need arises. It will help you maximize your profit while minimizing risk.
Goals and objectives
Define the specific metrics that will determine your success. It differs from the long-term objectives we discussed earlier because it’s a more focused analysis of the kind of progress you’d like to cover within three to five years.
Step 3: Buy your first real estate investment.
Now it’s time for the most exciting step, acquiring your first investment property. You’ll probably need a team of experts with experience in the real estate industry, like real estate agents and lenders. They will help you find the best real estate deals and financing methods. Once you’ve narrowed down a list of properties that you believe are worth investing in, you will need to perform a financial analysis to make sure they are financially viable.
Your analysis should account for the following factors.
- Our mortgage payment
- Utility fees (the ones you will be paying as the property owner)
- Vacancy
- Property management fees (where applicable)
- HOA (homeowners association) fees
- Maintenance fees and any other expenses.
Add more properties to your investment portfolio
It is vital that you grow your portfolio over time. It can be hard to accomplish with that minimal cash flow, but it’s not impossible. We discuss that subject in this video
Step 4: Diversify
A diversified portfolio ensures you take fewer risks with your investment. There are several ways to implement it. Here are a few
Diversify your asset classes
If you want to focus entirely on rental properties, you should consider purchasing different asset types within this category, like commercial spaces and apartment buildings. On the other hand, if you’re more of a commercial real estate investor, you should consider buying and renting out retail spaces instead of office space.
Diversify your investment strategy
If you’ve been buying investment properties, you may invest in a REIT, ETF (real estate exchange-traded fund), or a real estate mutual fund.
Diversify your real estate market
If you’ve been investing within the confines of your locale, you may try exploring other markets. Long-distance investing may seem scary, but it is a great way to profit from the real estate business.
Conclusion
Building your property portfolio might seem complicated, but it is doable. You should be well on your way with the tips we’ve covered in this article.
That said, if you’d like more help, we’ve got a great community that you can learn from.
Join us today to learn from a team of accomplished and experienced property investors.
