Real estate can be a hands-on way to start diversifying your investments. If you’re not afraid to roll up your sleeves and get to work, then building a real estate portfolio over time is likely a tempting option for you. Buying rental properties can be a flexible, engaging way to make money over a long period of time.
But purchasing and owning rental properties also tends to present a host of challenges, and many people don’t want to put in years or even decades of work before they see a potential payoff.
It takes money to make money, and building a real estate portfolio is no exception. Buyers will generally need to put at least 20 percent down on a building with fewer than four units and have a solid credit history to get a conventional loan, according to Bay Area mortgage professional and author Casey Fleming for U.S. News & World Report.
Lenders will also expect several months’ worth of savings in reserve and a steady income.
Here are five more tips for building a strong real estate portfolio over time:
Move Up the Rental Chain
Start small and work your way up. J.T. Purvis, an Arizona-based real estate company owner, worked his way up to managing commercial spaces but started out with single-family homes and duplexes.
He wrote in Realtor Mag that “the risks are less because homes are less expensive, it’s easier to find a replacement tenant, and people will always need a place to live.”
Make sure you have your footing with smaller rental properties that are easier to manage before you start acquiring more. Use your first rental property acquisition as a learning experience.
Know the Local Market
It’s important to understand the national market, but it’s make-or-break to understand the ins and outs of your local market.
Investopedia cites local unemployment data as a strong indicator of the health of a given city’s housing market.
When you’re first taking steps to build your portfolio, it’s easier to purchase properties in your area. Not only will you have a better grasp on the reputations of different neighborhoods, but you’ll be able to physically check on the properties when needed.
Outsource Management Tasks
When you’re actively trying to grow your real estate portfolio, it’s not uncommon for day-to-day details from your properties to slip through the cracks.
Sometimes what holds you back from making your next large-scale move is a backlog of tenant calls, paperwork, and repairs. Finding time to list your properties, screen tenants, coordinate move ins and move outs, and maintain the premises is a Herculean task for anyone to undertake.
Many landlords depend on total property management to help coordinate landlord-tenant communications, scheduling, and property upkeep. Many investors don’t want to be full-time landlords, and that’s where qualified management comes in to help alleviate some of the burdens.
Picture the Long-Term Future
Real estate does not provide the instant gratification that a half-hour TV special would lead you to believe. You will pour money, time, and energy into a property for months or even years before you see real returns on your investment.
For some, the long-term endeavor is worthwhile. The Balance points out some of the perks of successfully compiling a sustainable real estate portfolio:
-Monthly cash flow
-Appreciation in value over time
-Improvements can increase liquidation rates
-Inflation and population growth drive up rental prices
-Increasing equity over time
-Opportunity to strike when opportunities present themselves
Your main priority as you dip your toes into the ocean that is real estate investing is to make smart purchases. Assess how much you’ll have to invest in a property to bring it up to code and to attract tenants to sign a lease, especially if you’re looking at fixer-upper properties.
Never buy without analyzing the results of a thorough property inspection. Adding prudent properties to your portfolio at the right time will help you strengthen your investments and build an overall solid portfolio that will serve you for many years to come.