Category: Real Estate Strategy

How to Build Your Real Estate Portfolio From Scratch

Many of my friends and colleagues are interested in owning rental properties as a way to earn passive income. I think it’s awesome that people have this goal and that real estate can help them reach it. But I also want to help people understand exactly what it takes to get there.

Let’s say your goal is to eventually bring in $10,000-$20,000 per month, which would essentially allow you to retire from your 9-5 and start living life on your own terms. Let me be the first to say that I think this is a fantastic goal! But what’s your strategy?

In this article, I will walk through the steps of building your portfolio, starting with your very first property. I help you build a plan that will work for you without breaking the bank in the short term.
Let’s get started.

Step One: Assess Your Current Buying Power

This is going to look different for everyone, so stay with me. Depending on the amount of available cash you have, you might be looking to start with just one investment property, or a handful of them. For this example, let’s focus on just one.

If you have decent credit, minimal debt and a little bit of cash to put down, you may be in the perfect position to purchase your first investment property. I recommend discussing your options with a few different lenders.

Questions you should ask your lender include, but are not limited to:

  • How much can I be approved for?
  • What will my interest rate be?
  • What’s the difference in rates for investment homes vs second homes?
  • What are my options for the length of the loan and how quickly can I pay it down?
  • Are there any penalties for paying it off early?

Once you decide on a lender, be sure to obtain pre-approval so you can confidently put an offer in on a property when you find the right one. Once you collect all the information you need to make a good decision for your current financial situation, you can move on to the next step.

Step Two: Choose a Property in an Area That Sells

This may seem like a no-brainer, but it often is not. You need to start your property search by looking at the different areas of town. What areas are you interested in?

If you’re looking for a house in the suburbs that you can rent out to families, you will want to consider several factors that appeal to that audience. Most families are all about location, location, location. You want to find a neighborhood with easy access to schools, shopping, recreation and even places of worship.

If you’re considering a condo or high-rise downtown, the conversation shifts a bit. People looking to rent these types of residences tend to be single or married without children. Sometimes they are empty-nesters looking to downsize. In this scenario, you’ll want to consider parking, storage space and the amenities of the community.

The other thing to consider is whether or not the community you have chosen allows rentals. Whether it’s a neighborhood or a high-rise, chances are good that there are some restrictions on rentals. Be sure to do your research on your selected neighborhoods before putting in an offer.

Step Three: Purchase the Property

Once you’ve decided what type of property you’d like to purchase, BUY IT! Your realtor and lender will walk you through this process, but it basically entails putting in an offer, considering any counter-offers from the seller, going through the home inspection process, etc…

If you’re working with a realtor, this will all seem like a fairly simple process. If you ARE the realtor, you already know what to do.

Step Four: Marketing

Now that you own your investment property, it’s time to start marketing it and finding potential renters. Finding the right tenant has a lot to do with where you purchased your property and who your target audience is. If you’re still not sure who they are, do a little more research on your area.
You’re looking for information like this:

  • What are the market rates in your area for rentals of similar size?
  • Who are the main inhabitants in your area?
  • Who is moving in and out of the area?
  • What do people value the most about that specific neighborhood?

Once you learn a little bit more about the people living in the neighborhood, you can start to target your marketing to find the right tenants.

Social Media

It’s no secret that social media is one of the easiest ways to get your product or service in front of the masses. But again, do your research first. Based on what you learned about your target audience, join some online forums and groups that cater to those specific types of people.

You will be amazed at how much you can learn about your target audience by hanging out where they do. You’ll learn about their habits, hobbies, interests, dislikes and more. Once you learn more about them, you can craft your messages in ways that will resonate with them.

You also need to create social media accounts for your properties or your business as a whole. Remember that the internet is a visual medium, so you need really great photos of your properties to entice people to click. Once they click, you need more photos for them to view.

Give them more information than they need. If they feel like they have to search for it, they will exit your post and keep scrolling.

Word of Mouth

As antiquated as it may sound, people still take recommendations from their friends, family and even anonymous people online! Think about it… you read Amazon and Google reviews before purchasing, don’t you?
Ask existing tenants to write testimonials for you. Or do a short 30-second video of them saying their testimonial out loud!

Online Marketplaces

There are tons of places online where property owners can advertise their available properties. You can look at the various platforms, their fee schedules and requirements and figure out what will work best for you. Here are just a few options:

  • Zillow
  • Realtor.com
  • Hotpads
  • RentalHouses.com
  • Oodle
  • Padmapper

Depending on your marketing budget, some of these might be more realistic for you than others. But they are worth the time investment to at least learn what your options are.

Your Own Website

Whether you’ve been in business for several years, or you’re just getting started, a website can be one of the most lucrative things you can invest in. Consumers are savvy and information-hungry. They want information at their fingertips when it’s convenient for them.

Just as with social media marketing, you want to make sure your website has fantastic images and lots of information. Have you ever been looking for a house online and you won’t even click on the ones with terrible photos? Your customers are the same way!

Take the time to take great photos of the home. If you can invest in a professional photographer, go for it! If not, newer smart phones have fantastic cameras, so you can get some great shots on your own.

Last but not least, consider whether or not you need to hire a professional web designer. If you have the expendable cash, it can be a great investment. If not, I recommend either WordPress or Wix. Both platforms are designed to help non-web-designers create and launch their own websites.

Step Five: Screen Potential Tenants

This process can seem daunting when you’re just getting started. But I recommend you to be as diligent as possible to minimize the risk to your property and your business. The following steps are critical in the process of screening potential tenants:

Have potential tenants fill out an application. You can create one on your own, use a template or have a lawyer draw one up for you.

Run a credit check. This will give you information on the past 7-10 years of the tenant’s payment history to other creditors, including past landlords. Depending on what state you live in, you may or may not be able to charge the potential tenant for the cost of the credit check.

Run a background check. This will give you information about the tenant’s past. You can order these through companies such as StarPoint and ScreeningWorks. This will give you information about previous evictions, crimes committed and other public records.

Complete reference checks with previous landlords. If your application is thorough and includes past landlords / living spaces, you can reach out to these people for information about the tenant’s behavior and payment history.

Call the tenant’s employer. Verify the income amount that they listed on their application. You want to be confident that they can pay the rent on time each month.

Interview the tenant. This is one of the most important things you can do. It will be mutually beneficial for both parties to get to know one another and decide whether or not the relationship is going to work.

Step Six: Do It Again!

Once you’ve gone through all the steps listed above and you have some renters in your first property, you can start considering what your next property will be. You can return to step one and start again!

However, I highly recommend waiting for a little while until you’re comfortable. Get to know the process and how to manage your first investment property before going out on a limb with another one!

Over time, your income per month will hopefully grow and you will have more to invest. As I said in the beginning, you can absolutely grow your business to the point that you can walk away from your 9-5. It just takes time, patience and smart decision-making.

Should I Hire a Property Manager?

Only you can answer that question for yourself. Maybe you were an executive at a company and didn’t have the available hours in the day to dedicate to your rental properties.

You may or may not be in that situation. If you have the time and the know-how to market your properties, screen clients, handle maintenance issues, etc. then you will be fine! If not, I really do recommend a management company to handle those items for you.

If you screen them carefully, you will find one that fits your needs and your budget. I also base a lot of my decisions on how I feel about their integrity. You need someone who will be honest and who is licensed and insured,

Conclusion

Hopefully you now have a clear understanding and the outline of a plan for how to go from where you are right now to owning your first investment property. Remember that it takes time to build your portfolio. Not overextending yourself at the beginning will help you be more successful in the long-term.

Happy investing!

Picture: Pixabay

Investing Through the Buy and Hold Strategy

Real estate has long been considered a viable and reliable area for investment. Unlike the stock market, which can fluctuate based on the whims of the market, real estate is relatively cyclical in terms of time and is extremely local in nature. This means that a slow market in Los Angeles, California does not necessarily mean a slow market in Miami, Florida. In addition to this, the asset in a stock market is just a number on a computer screen – it’s not tangible, or something you can touch and feel. Let’s compare this to real estate, where you can actually see (and live in!) the asset you buy. You can add paint to improve it cosmetically, do more extended maintenance to improve it structurally, and generally control what you do with the asset.

Passive real estate investing through the “buy-and-hold” strategy entails buying a property for the long haul. This is opposed to wholesalers and flippers, who buy properties in the hopes of making a quick return. Buy-and-hold investors purchase a property, typically using bank financing, and rent it out for long-term passive income. The term “passive” means that you are not actively working for the money you earn. After the initial investment into a turnkey residential property or an income-producing commercial property, investors typically hand the property over to a property manager who takes care of the tasks related to hosting a tenant. These investors then receive a check from the property manager each month with a portion of the earnings.

The buy-and-hold strategy is ideal for retirees who don’t want to actively manage an investment and just want to receive a steady flow of money throughout their retirement. It’s also quite ideal for young investors who have a longer investment horizon, or time consideration, for their investments. They can purchase income-producing properties whenever they are financially viable, even at the start of their careers! Now they can collect a paycheck from their employer and a check from their rental property. Most employed adults have a 401-k plan through their employers, and typically have a pension plan as well. Real estate investing is a steady and relatively safe way to build a retirement portfolio and diversify your investments even further.

One important concept related to passive real estate investing using the buy-and-hold strategy is the benefit of using bank financing instead of buying a property with cash. It’s true that you can often negotiate a much lower purchase price when you have cash to pay with – it’s enough of an incentive for the seller to forego the pains of dealing with a buyer who must get approved for a mortgage and ultimately fund the loan at the closing table. The seller gets cash in their bank account, and the buyer walks away with a new property – everybody wins, right? Not exactly, and that’s due to a concept called return on investment, or ROI.

Return on investment is a metric that many investors use to determine how successful their investments are. It’s expressed as a percentage and is calculated with a simple math problem: (total money earned) divided by (total money spent). It is typically calculated on an annual basis, so the ROI for your first year owning the property will be calculated as follows: (total rent money earned in year one) divided by (total amount of money spent purchasing the property, including the purchase price, closing costs, and any money spent on initial repairs and improvements). This calculation gives the investor a general idea of how much “bang for the buck” the property has.

When an investor buys an investment property using all cash, the portion of the equation related to the total amount of money spent is extremely high. This, in turn, drives the ROI metric down and essentially tells the investor that he or she is getting a low return on the property for year one. On the other hand, when an investor buys a property with bank financing, the bank typically requires a 20-25% down payment. Though this may sound high, it’s a lot less money than paying 100% in cash. This lower initial investment will drive the ROI up when compared to a cash transaction. Keep in mind that ROI should increase as the years go on, because the total money spent is generally the highest at the time when the property is initially purchased. ROI is just one of many metrics that investors use to gauge their success, but it can be a quick and helpful signal.

Once you’ve decided whether to purchase using cash or financing, it’s important to have a general sense of what your profit will be. A licensed real estate agent will be able to help you get the relevant figures for the properties you are interested in. Profit is essentially the money you earn after all expenses are paid, and for a residential rental property it’s calculated as follows: (total rental income) minus (total property expenses). Pretty simple, right? Let’s expand a bit on what property expenses consist of. These include your monthly mortgage payment if you’re using bank financing and monthly HOA dues if the property resides in an area with a homeowner’s association. It’s also important to include escrows in your calculation of property expenses. Escrows are funds put away for later, and these include property tax payments, property insurance payments, and a reserve for maintenance and repairs. You should determine what profit threshold you are comfortable with so that you can easily spot the properties that fall within your requirements.

Here’s a simplified example of how to calculate your profit. Let’s say you found a single-family home with 2 bedrooms and 2 bathrooms. You’re putting down a total of $50,000 plus $5,000 closing costs. The homeowner’s association charges $150 per month. The yearly taxes on the property for the prior year were $3,000, and property insurance runs about $1,500 per year. The property needs a little bit of work, so you figure you’ll need $500 for paint and electrical panel replacements. After speaking with your mortgage broker, you find out your monthly mortgage payment will be $800 per month. Then, after speaking with your real estate agent, you find out that the average rent in the neighborhood is $1,600 per month for a 2-bedroom, 2-bathroom house. What’s your profit? How about ROI?

Profit = Total Rental Income – Total Property Expenses
Total Rental Income = $1,600 per month

Total Property Expenses = $800 monthly mortgage payment + $150 monthly HOA payment + $250 monthly tax escrow + $125 monthly property insurance escrow

Profit = ($1,600) – ($800 + $150 + $250 + $125) = $275 per month

Return on Investment = Total Money Earned / Total Money Spent
Total Money Earned = $275 monthly profit * 12 months

Total Money Spent = $50,000 down payment + $5,000 closing costs + $500 initial repairs

ROI = ($3,300) / ($55,500) = 5.9% annual ROI

Once you have these figures, you can make a more informed decision on whether the rental property in question is right for you. If you’re ready to get started with passive real estate investing through the buy-and-hold strategy, consult with your licensed real estate agent and mortgage broker.

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