A real estate portfolio, consisting of different types of rental properties, can be just one part of an investor’s portfolio of investments. The entire portfolio will have many investments, including stocks, bonds, short-term investments, international stocks, and real estate.
This strategy is part of the investor’s overall plan to diversify their investments and ensure that risk is not concentrated in a single asset class. It is a standard approach used by large investors. The real estate component of the portfolio will often grow to include billions of dollars worth of real estate, explains Upkeep Media.
But a real estate portfolio is something any investor can add to their investment portfolio. This strategy is not the sole domain of the big players. For retail investors – individuals like you and me – a real estate portfolio is recommended as a way to generate rental income and build generational wealth.
But given that you do not have access to the kind of money available to institutional investors and billionaire real estate moguls, how can you incorporate real estate into your investment portfolio? How do you get started building a real estate portfolio? This six-step action plan will give you the information you need to achieve this in record time.
6 Simple Steps to Build a Real Estate Portfolio
Step #1: Educate yourself
There are two ways to pay for an education; through mistakes or by willingly investing time and money. If you get into real estate investing without properly understanding how property investments work, you will get burned.
The bad experience may teach you a lesson, but it may be a negative one; you’ll learn what not to do and might lose the motivation to try again. The education you need will teach you the actual steps to take and offer guidance as you do them.
Step #2: Write a business plan
The business plan outlines the path from where you are to where you want to be. As an investment planning tool, an outline clarifies the different aspects of your goals and gives you a structured way of thinking about them.
Three key components of a business plan for investing in real estate include:
- Defining your investment strategy – should you buy and flip houses, or is it better to buy and hold the properties?
- Defining your goals – what are the short-term and long-term investment milestones you want to reach in the coming weeks, months, and years?
- A financial plan – how will you fund your real estate investments?
Step #3: Know how to evaluate a rental property and its location
The location of a rental property is the most important factor for its success; location determines the demand for your property, the caliber of renters you attract, the rental rate, and how much money you make from the investment.
Some of the parameters for assessing the desirability of a location include population, jobs, transportation, amenities, crime rates, entertainment or recreational facilities, and schools. Additionally, to determine the viability of a rental property before you buy it, you must know how to look at the numbers, expenses, rental income, taxes, etc.
Step #4: Find a property
As a beginner real estate investor, you may want to start with a low-cost property. Your first rental property is vital to your success. If you succeed with the first one, the next one will feel much simpler, giving you room to learn the ropes of managing a rental property without exposing yourself to many risks.
A trusted local real estate agent with know-how in finding and buying income properties can be a great asset. Before purchasing a property, important things to review are the title document, maintenance records, tenant ledger and lease summary (if it is being used as a rental), and estimates of costs and expenses.
Step #5: Buy the rental property
As soon as you determine that the property meets your criteria, take action. Before you reach this point, it is assumed you already have the down payment for the property. If you don’t put the property under contract, another investor may steal it from under your nose.
It also helps if you are preapproved for a mortgage; this will give you an edge when competing with other buyers. Two steps for finalizing your property purchase include a home inspection and home appraisal. They ensure that there are no issues with the property and you are not overpaying for it.
Step #6: Rinse and repeat to scale up your real estate portfolio
As tempting as it might be, try not to spend the income from your first rental property. Keep your objectives in view, and bear in mind that the goal is to own a portfolio of properties. One of the best ways to reach your destination more quickly is to adopt the snowball method. Save the cash from one property and use it as a down payment for the next property.
You may also use the built-up equity in a rental property to buy another property. If you follow this plan, you will be shocked at how quickly you will arrive at your goals.
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