You’ve had a taste of the real estate investing life and, after seeing the money flow into your bank account every month, you’ve been looking for ways to multiply that cash.
You want the buildings. You want the tenants. You want the kind of real estate empire that makes investment bankers and stock market watchers say, “Man, I wish that company was publicly traded.”
Or maybe that’s not you. Perhaps you’ve decided that you want to go all-in on a real estate investment business, and you’ve been browsing through listings, but you’re still looking to get your feet wet with your first investment property.
So how do you go from one investment property to a hundred? Is there a way that you can grow your real estate portfolio without losing your sanity in the process?
We’re about to tell you what you need to know about scaling your real estate investment portfolio. All you have to do is keep reading.
Phase One: Laying the Groundwork
Even with a definite cause and passionate troops, you would never see the military rush into the battlefield without a plan. Why Because having an end goal isn’t always enough to win.
It’s essential to have a strategy that can take you from point A to point B. So before you start talking to lenders and advertising for tenants, here are some crucial details that you’ll want to hammer out:
1. What Type of Property Will You Invest In?
You don’t need to be a professional realtor to know that commercial real estate is often very different from residential real estate. But even within those two broad categories, there are many additional forms that an investment property can take. These include:
- Condos
- Townhouses
- Shopping centers
- Office buildings
And just to make matters even more complicated, these general property types can be broken down even further by details like the building’s location or its relative value. Low-income earners, for instance, will have completely different financial concerns than a mid-income family or an executive with a private jet.
Similarly, if you’re leasing to a mom-and-pop shop, you’ll have to position your property differently than if you’re targeting an international chain.
These details are important because, as an investor, you’ll need to become an expert in your corner of the real estate market. And when you’ve picked a niche or two, it becomes a lot easier to drill down, spot trends, and use your expert-level knowledge of the market to make more money.
2. What’s Your Investment Strategy?
It’s not enough to know that you’re looking for apartment buildings in medium to high-income neighborhoods, although that is an excellent start. You also need to figure out how you intend to go from “Okay, I own this investment property” to “Cha-ching! And another one hits my bank account!”
You can go for a buy and hold approach to purchase the property, make repairs, and then rent it out for monthly income. However, house flipping is a thing in part because of how it allows you to get in and cash out quickly without having to vet tenants, deal with rental disputes, or keep a legal team on retainer in case of lawsuits.
No one can tell you what the right approach is for your business. But either way, you’ll need to know your strategy because your profit margins and the price point that puts a property into that’s-a-good-deal territory can look very different depending on your method for realizing value.
3. How Will You Finance Your Purchases?
Of course, it’s not enough to have a strategy in place and a general sense of what market you’re going into if you don’t know how to go from seeing listings to closing on the sale. Interestingly enough, real estate investors have a few options on this front:
Option #1: Cash
This is probably the most straightforward approach. Just as you would pay for groceries or a meal out, you can purchase property with a debit card or line of credit.
Of course, your ability to pull this off will depend on your savings and other financial resources, although services like discount contractor supply can help to lower the cost of buying and renovating. But for most first-time real estate investors, this approach to purchasing an investment property is quite common.
Option #2: BRRRR
Made famous by David Mason Greene’s book by the same title, BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. With this approach, you purchase an investment property, repair it, and find a reliable tenant.
Then, using the rent you’re receiving every month, you build equity in the property over time. When you become eligible for refinancing, you use the funds to buy another place.
And then, when the next property becomes eligible for refinancing, you simply rinse and repeat until you have multiple properties in your portfolio.
Option #3: Snowball
This strategy is, in some regards, a happy medium between paying in cash and the BRRRR method. The snowball approach involves taking the money made from your portfolio and then reinvesting the rental money into purchasing more properties until you reach a point where your investment income is where you want it to be.
This is tough going when you’ve got just one or two properties in your portfolio. But when you’re making money from five or six investment properties, acquiring a seventh with your cash flow becomes a lot easier.
A Note on the 1031 Exchange
This isn’t an investment method per se, but it is a benefit that’s worth keeping track of as you time your purchases. You might hear your tax accountant or real estate lawyer mention the words “1031 exchange.” They’re referring to a part of the Internal Revenue Code that allows investors to defer paying capital gains taxes by exchanging a like-kind property.
Here’s what this looks like:
If you buy a real estate property for $50,000 and a few years later you’re able to sell it for $150,000, if you use the money from the sale to buy a $300,000 house, you may be able to avoid paying the capital gains tax on the house you sold. You’ll want to consult with a tax professional on this subject, but if you want to maximize your returns, you can’t go wrong with this strategy.
4. Have a Real Estate Business Plan
You hear the idea of a “business plan” get talked about reasonably often on shows like Shark Tank or when people with MBAs discuss the fundamentals of starting a new business. Because real estate seems like a relatively straightforward process on paper, it’s easy to think that you don’t necessarily need to do a lot of planning.
But there’s a reason why entrepreneurs are encouraged to have a solid plan in place before they start pursuing funding or purchasing prototypes:
All businesses can be unpredictable.
If your property type were to fall in value overnight, would you have a strategy? If something were to happen to you, what kind of continuity plans or insurance policies would you or your estate need to have in place? Do you have an exit strategy for when you’re ready to retire?
A real estate business plan will look different from a strategy put together for a company selling widgets or software. But it’s better to plan for both best-case scenarios and worst-case scenarios.
5. Build a Team
In economics, there’s a concept called an “economy of scale.” This might sound a bit technical, but basically, it means that when you allow people to specialize in doing one or two things well, they eventually become so skilled at that task that it reduces the inputs and the time needed to produce a good.
So what does this have to do with growing your real estate business?
Everything.
One thing you’ll have to accept about growing your business is that your real estate portfolio will quickly reach a point where you not only shouldn’t do the work yourself—but realistically, you can’t. Whether it’s finding properties, using services like Hmbdrealestatemarketing.com to help with your listings, or maintaining your properties, the sooner you can build out a reliable team of all-stars, the easier it’ll become to grow.
Phase Two: The Execution
You’ve laid out your game plan, you’ve done all the planning, and the pieces are now in place. All that’s left for you to do now is execute your real estate investment strategy. Here are some tips that you can use to position your real estate business for success:
1. Get to Know Your Local Real Estate Market
There’s being familiar enough with your community that you can kind of tell other people where the high-value homes are and where the business district is. And then there’s knowing your real estate market like you have money riding on it partly because you do as a real estate investor.
In June of 2020, the median home sale price was $295,300. And if you’re purchasing multi-residential buildings, those numbers can only go up. When you have a comprehensive knowledge of your market, it becomes a lot easier to spot money-making opportunities.
2. Don’t Be Afraid to Diversify or Change Course
If you asked a random person in the 1980s whether residential real estate was a better investment than commercial real estate, chances are there would have been a solid argument in favor of business real estate. After all, it just made sense that while people could go bankrupt or lose their jobs, businesses and major corporations would always need office space.
Fast forward to 2021, however, and with remote positions and work-from-home arrangements becoming more common, massive office towers and skyscrapers may not be the norm for companies in the future.
What this means for your business is that you don’t want to be the investor holding excessive amounts of office space when tech-based firms and companies are taking up less space in 20 years. To that end, if you see an opportunity to pivot or to monkey branch your way into a more profitable purchase, don’t be afraid to sit down, make a strategic plan, and go for it.
3. Know What Success Looks Like
Have you ever seen a movie where the bad guys are rolling out their plans competently until the short-sighted head villain says something like, “How come you haven’t completed the plan? It’s been three whole days!”?
As a real estate investor, you want to be on top of things. You want to make sure that you’re filling rentals and selling at a decent clip. And at the same time, you also want to make sure that you’re not bleeding cash like a popped balloon releasing air.
But all of that being said, you need to have a solid sense of what success means for your real estate business. Are you mostly on track? Is your portfolio heading in the right direction?
If trends look strong, it might not be a good time to flip over the chessboard and walk away.
How Big Is Too Big in Real Estate?
We often talk about real estate as a booming industry with a borderline can’t-fail business model. But as is the case in any business, there is such a thing as becoming a victim of your own success.
How so?
Because in the same way that a business can fail due to passing up money-making opportunities, companies can also fall apart simply due to growing too fast. If you were to go from zero properties to 100 properties over several months, you could quickly find yourself losing track of your money or struggling to hire enough people to keep up with the demand.
Finding the right pace is something that no one else can do for you. But it’s essential to keep your finger on the pulse of your business.
Financial Freedom With Real Estate Investment Business
They say that a real estate investment business is as close to being a guaranteed moneymaker as it gets. After all, everybody needs a place to live or a place to work and do business. And with the help of a strong plan and a solid execution strategy, it’s clear that there’s a lot of money to be made in real estate investment.
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