How to Build a Real Estate Portfolio

Real estate investing is one proven way to generate regular income and grow wealth. With the proper approach and discipline, everyday investors can realize surprising returns from managing real estate properties for lease or rent.

What steps and considerations are involved in building a real estate portfolio? This guide looks at some of the most important factors and steps to take for your financial future.

What Is a Real Estate Portfolio?

A real estate portfolio is a collection of real estate assets aimed at generating regular revenue or dividends. A portfolio can include properties that generate income through rental fees or capital appreciation. 

Some typical real estate investments include:

• Rental properties
• Flipped homes
• Real estate investment trusts (REITs)
• Commercial properties
• Undeveloped land

Assets in a real estate portfolio have varying levels of risk and rewards. 

How to Build a Real Estate Portfolio

Building a real estate portfolio requires strategic planning and intelligent decisions. Here are a few guidelines for constructing a profitable set of real estate holdings.

Set Your Investment Goals

The key question to answer with any investment portfolio, including real estate, is what goals or results you want to meet. Generally, real estate investments cover three key objectives: increasing cash flow, appreciating capital and maintaining a healthy balance of the two.

Your goals should inform a road map for your real estate investments, guiding your actions and decisions. They’re more manageable when you set precise, quantifiable targets that are easily measured.

Understand the Basics of Investing in Properties

There are a few ways to produce regular income through real estate investments, such as:

• Rental income, residential or vacation
• Commercial leasing
• Property appreciation
• REITs and partnerships
• Fixing and flipping of residential properties
• Development of raw land

Buying real estate is a complicated process that demands careful consideration of certain factors, including:

• Location
• Type of property
• Financing
• Due diligence and evaluation concerns
• Real estate appraisals
• Closing processes
• Property management, when applicable

Factoring these elements into your decisions can make real estate transactions more successful and easier to execute.

Select the Right Real Estate Investment

Picking the real estate investments that suit your needs should take several factors into account:

• Type of property
• Location
• Overall market trends
• Risk tolerance
• Property condition and renovations
• Property management strategies
• Tax implications
• Investing and exit strategies

It’s important to establish standards for measuring success in real estate investments. Some of the key metrics to focus on are as follows:

• Capitalization rate: Property’s yearly return as a percent of its purchase amount
• Cash-on-cash return: Amount of cash flow generated before taxes
• Return on investment (ROI): Property’s return or appreciation over a certain period

Other important metrics include gross rental income, vacancy rates, average stay length, operating expenses and liquidity. Additional metrics could come into play as well depending on the types of properties and income strategies you choose.

Know Your Financing Options

Real estate investors have an array of possibilities for financing their properties. Some of the typical financing plans include:

• Conventional mortgage
• Government loans (Federal Housing Administration, Veterans Affairs, U.S. Department of Agriculture)
• Private loans
• Home equity loans and lines of credit
• Commercial loans
• Crowdfunding
• Cash-out refinancing

The financing options available to investors vary according to factors like credit history, income, debt-to-income ratio, property appraisals and down payment. 

Get Educated on the Local Real Estate Market

Location is one of the primary factors to think about when investing in real estate. Before looking, research as much as you can about the property and its surrounding area. Focus on information like:

• Supply and demand of local properties
• Potential for appreciation or revenue
• Affordability
• Population history
• Economic indicators such as job stability and interest rates
• Local amenities
• Crime data
• Zoning regulations

The more informed you are on the local market, the better your chances of making smart investment decisions.

Establish Property Management Strategies

Real estate properties must be properly managed to retain their value and profitability. The two main options for property management are to do it yourself or hire an outside property management company.

Self-management puts you in control of all the facets of your property, including maintenance, insurance, upkeep and tenant relations. This kind of control may be beneficial for tenant relations and could save you some money. 

An experienced property management company has great expertise in management and regulatory compliance. Many have vast networks of contractors and specialists that can speed up certain management processes.

Calculate ROI With the 1% Rule

Return on investment is a simple calculation that determines your expected profitability on a real estate property. Take your expected annual return rate, subtract expenses and operational costs and divide the result by the property’s mortgage value to determine your projected ROI.

The 1% Rule is a measuring guideline that gives an estimate of a property’s potential ROI. The rule of thumb says that a property’s monthly rental income should be as close as possible to 1% of its acquisition costs. Apply the 1% rule using these steps:

• Collect property details (purchase price, market value, estimated income).
• Determine the monthly rental income.
• Specify the total cost of the acquisition.
• Multiply the acquisition price by 1% for the required monthly rental income.
• Consider extra expenses like taxes, insurance, maintenance and vacancy rates.
• Calculate your estimated overall ROI.

Remember that the 1% Rule is good for a quick, initial estimate. It may not be entirely accurate depending on certain factors about the property.

Scale and Diversify Your Real Estate Portfolio

Your real estate portfolio’s long-term growth depends on your ability to scale up your investments and keep them diversified. It’s easier to mitigate risks, spur capital appreciation and build wealth when a portfolio has multiple holdings across several asset classes and strategies.

Think about adding different property types to your holdings, like residential, commercial or mixed-use properties. Additionally, consider other strategies for generating income, such as vacation rentals, fix-and-flip homes or REITs to monitor and balance your portfolio.

Adapting to Market Changes

Having a diverse portfolio of real estate investments also helps you navigate an ever-changing marketplace. Stay on top of local trends, economic indicators and compliance measures to protect your holdings. 

It’s better to take a long view of your market, focusing on its fundamentals and intrinsic values. A strong network of industry experts and fellow investors can help you learn more about local changes. 

Benefits of Building a Real Estate Portfolio

Building a strong real estate portfolio can result in a few advantages, including:

• Passive income generation
• Potential for appreciation
• Tax advantages from interest deduction, depreciation and tax deferral
• Hedges against inflation as the property appreciates

You can receive some or all of these potential benefits through a combination of smart investment strategies and management moves.

Find Out More About How to Build a Real Estate Portfolio

Real estate remains one of the strongest ways to grow wealth and generate dependable income through rental and appreciation. The longer you can hold a portfolio together and scale up, the more success you’ll experience.

Frequently Asked Questions