A well-diversified real estate portfolio is one of the best wealth-building tools that you can have. Unfortunately, many people view it and see it as unattainable. With the help of The Hard Money Co., you can get started on a path of real estate investing and begin creating a wealth-generating portfolio of your own.
Below you will find some recommendations and insights that we've built in our decades of real estate investment experience. A well-founded strategy can be a catalyst for growth and help you establish the portfolio of your dreams.
Real Estate Portfolio Basics
It's not too complex. A real estate portfolio is a collection of property assets and a supplementary document that outlines the past, present, and future of your real estate investments. For your purposes, your portfolio is a resume that outlines your experiences and successes. Many include flipped homes, rental properties, or REIT investments that make up your involvement in the real estate sector. While you certainly want to outline your existing holdings and positions, it's also important to document past successes to demonstrate your acumen. It's important to note that 'portfolio' is a malleable term that can be used flexibly in different settings.
Want to Build Your Real Estate Portfolio?
Here are some basic tips, tricks, and insights that The Hard Money Co. has learned over the years.
Take Baby Steps
We hate to break it to you, but it's unlikely that you're going to buy a multi-million dollar commercial office building as your first investment. Even if you could, it's smart to avoid anything that's too ambitious with your first investment. Look for easy wins with well-trodden investment strategies. These will give you a long runway to get started while learning the ins and outs of increasing a property's value, managing tenants, and securing finance in a relatively low-stakes environment. There is plenty of time for bigger challenges down the road, but don't bite off more than you can chew right away.
Growth over Glamor
It's easier said than done, but investing in popular markets such as California, New York, or Florida is a saturated market. It's likely that pricing in those markets is relatively efficient, and if anything, is overpriced relative to its growth potential. The same is true for some suburban or metropolitan markets that might be wonderful properties, but lack the upside that makes them great investment vehicles. In order to drive the biggest margins and build the most impressive portfolio, look for the diamond in the rough. It's far more impressive to make $10,000 on a small home flip than it is to lose money on a million-dollar property.
Real Estate is Local
Invest in what you know is a tried and true axiom in the financial world. The same holds true for real estate. So much more goes into a property than the building itself. You need to understand the factors that contribute to making it a valuable property outside of the tangible. For residential units or rental properties, you have to consider the community. Is there access to nearby grocery stores or other shopping? What do the schools like in the area? Are there undesirable characteristics that would discourage people from living there? On the commercial side, you need aspects that will attract employers and employees alike. Is it reasonably close to public transportation or a highway? What does the labor market look like nearby?
These are all factors that will affect your bottom line, and there's no better way to get the facts than by looking locally. If you live in Minneapolis, you'll have a hard time knowing the ins and outs of the market in Phoenix. Additionally, living in or near your investments makes management a much simpler endeavor. Chances are the opportunities in your hometown are just as good as ones outside your state.
Be a Note Taker
Having a detailed history of successes and failures is only as valuable as your ability to remember them. Taking notes on every aspect of your investment journey, from research to financing to renovation to resale, will be invaluable on future properties. Additionally, it will help demonstrate your growth as an investor and a property owner. Your goal is to grow, and taking notes is essential in doing this.
Think About Your Financing
It would be great to have cash on hand to start investing, but for most of us, that’s not the case. You need to be well-versed in the financing options that are available to you and which ones best serve the investment properties you're looking at.
Hard Money Loans: Hard Money Loans, such as the ones provided by The Hard Money Co., are short-term loans that use the property as collateral. The lender will take 1st lien position and in the event that something goes wrong during repayment, will take control of the investment property. Hard Money loans are ideal for investment opportunities with obvious upside where traditional financing methods may not be available. This is often the case for Fix-and-Flips, where the underlying asset is too distressed for a bank to lend against. For more information on Hard Money Loans, reach out to a representative or fill our application today.
Traditional Bank Loans: These are similar to your personal home mortgage and are often low interest and long term. However attractive these loans may be, they are often difficult to obtain for investment opportunities because of the level of risk involved. They are worth exploring if you have a secure, cash-flow-generating property, but may not be accessible for first-time investors.
OPM (Other People's Money): You're an ambitious, intelligent person, dead-set on creating wealth through real estate investing. Why wouldn't someone want to get in on your future success? Using other people's money to begin property investing is more common than you think. The promise of generating outsized returns with little effort is an attractive proposition to people with a little extra cash. Look to friends, family, and your network for people who fit the bill. Just know, the fiduciary responsibility you have to your investors is not to be taken lightly. You must be willing and able to make timely repayments and have immaculate communication throughout the property. In many ways, this is riskier than other financing options because your personal relationships are at stake.
Be Numbers Oriented
Any investment no matter the asset class comes down to dollars and cents. The more numbers-oriented that you are, the better chance you have at success. So many factors come into play for successful investments that ultimately can make or break your profitability. Before you get started, you should have a clear path forward with project estimates and a margin of error that allows for income generation. Here are a few items for consideration:
Purchase Price: Though obvious, every dollar you can save on the purchase price is a dollar of additional profit for you. It may not seem like much to save $2,000 on a $100,000 property, but that is your money. Don't let large numbers obscure small value gains across the board.
Repair Costs: Drawing up a scope of work prior to purchase is essential in knowing what you're going to spend, and what your return on investment will be. That water feature you were considering won't improve the property value, but you can be certain that an updated kitchen will. Know what you intend to spend (after purchase) and what that means for the bottom line.
Rental Revenue: If you are renting (rather than flipping) a property, you should know exactly how much you intend to rent for and how that stacks up with your monthly costs. In some circles, this is called a Debt-Service Coverage Ratio and is important for securing follow-on, long-term financing.
Your Portfolio is Your Resume
Your portfolio is the best way to demonstrate your ability to invest in real estate. It can be an absolutely essential tool in securing financing with traditional loans or an investor network. You can also use it to secure partners or collaborate with contractors who will be assured that you are serious about profit generation. It is an essential summary of you and your investment history.
A diversified portfolio is extremely important in building a safe, long-term, nest egg. It may seem that diversifying within real estate is difficult, but there is actually a wide range of ways to do so. You can invest in fix-and-flip, rentals, commercial units, land speculation, REITs, multifamily, rental properties and so much more. Be aware though, real estate is a hands-on investment path. The thinner you stretch yourself, the more you open up your portfolio to risk exposure. If you feel confident and competent in your abilities, by all means, explore diversification in real estate.
That said, many people view real estate as diversification in and of itself. Make sure all of your resources aren't in this one sector and consider other conventional asset classes such as stocks, bonds, and mutual funds that add another level of stability to your financial future.
Start Building Your Real Estate Portfolio Today
There is nothing stopping you from opening up a word document, spreadsheet, or internet browser to start building your portfolio right now. Even without any assets you can start your research, look into financing options, and assess your strengths and benefits to draft a sound real estate strategy. That is the foundation of a portfolio and soon enough it will be filled with wealth-building real estate assets.