How to Build a Real Estate Portfolio
Building a real estate portfolio is crucial if you are interested in building long-term wealth in real estate. A real estate portfolio is a strategic catalog of current and past real estate assets, whether rental properties, flips, or REITs (Real Estate Investment Trusts), to earn monetary returns.
A well-maintained real estate portfolio will showcase your personal investment goals and strategies, the inner workings of completed deals, as well as your success/, fail rate. Your portfolio can also include your buying philosophy and testimonials from other lenders you’ve worked with. In this blog, Seattle real estate expert, Jim Thorpe explores how to build a real estate investment portfolio. Whether you’re a beginner or an experienced pro, read on for valuable tips!
Tip #1: Define Your Real Estate Goals
Deciding on what you want to accomplish early in your real estate career can do wonders for you. Seattle real estate expert, Jim Thorpe recommends creating a 5-year plan is a great way to visualize your real estate goals. To begin, try to visualize where you would like to be in 5 years. Start by visualizing who you would want to be surrounded by. Who are your mentors five years down the line? How productive do you want to be? Once you have visualized the ‘who’ aspect, it’s time to move on to the ‘where’ aspect. Where do you see yourself in five years? What are you doing by then?
Avoid setting vague goals. Don’t simply say that you want to be successful in five years, define what success means to you. Everyone’s symbolization of success is different. Create a clear vision of the type of properties you want to invest in. Are you interested in short-term or long-term investments? By envisioning your future portfolio you avoid wasting time and making careless mistakes.
Tip #2: Acquiring Investment Properties
Another essential part of learning how to build your real estate portfolio is asset allocation. For investors, this includes determining the appropriate asset allocation model for your goal. Below are a variety of methods to consider when acquiring investment properties.
The Snowball Method
The idea is fairly simple. You start with your one investment property; using it to finance your next one; creating your own snowball effect.
To begin, you start by saving the cash flow from your rental property for a couple of years. Say your rental is netting $1,000 per month in income. This means after saving for two years you’ll have $24,000 –enough for a 10% down payment on a $240,000 house, or 20% on a $120,000 property. You’ll then be able to invest in your second property, and once there is cash flow, you’ll then be able to save the proceeds from both properties, and after a year, will have a sizable amount of cash –enough to buy a third. And so on, the cycle continues. Each time you add a rental property to your portfolio you’ll be able to save up for a down payment more quickly –as your cash flow increases with each addition.
Another way many investors get started with rental properties is by buying a duplex, or triplex, as their first property. They then rent out two of the units, often the biggest or nicest ones, and live in the small unit for the first year or two as an owner-occupant. This allows them to live rent-free, as the tenants pay the mortgage down.
The BRRRR Strategy
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. Basically, you purchase your first investment property below market value and rehab it. The property is then rented out to generate rental income that enables you to pay the mortgage, earn profits, and build up equity over time. Then, you refinance the rental property to get your original capital back and buy a second property. As the last R suggests, you can repeat the process to buy multiple properties and build a real estate portfolio from scratch!
The 1031 Exchange
When real estate investors sell properties, they pay some hefty capital gains taxes. This takes a portion of your profits that could go into buying another property. However, you can avoid paying this tax if you do a 1031 exchange. Following this strategy, you’ll have to reinvest all of the proceeds in a new investment property or a portfolio of properties of equal or higher value. So basically, the 1031 exchange allows you to build a real estate investment portfolio by trading one property for another without paying real estate taxes!
Real Estate Partnership
If purchasing an investment property seems like too big of an endeavor, there are other options that require less capital and less commitment. Consider partnering with a company that specializes in turnkey real estate development and fix and flips. They simplify the real estate investment process and save you both time and money. With this method, you can benefit from having real estate experts source off-market property for you and deliver a turnkey property. This is a great option if you are new to real estate investing or interested in scaling your investment portfolio and increasing productivity.
Tip #3: Consider Your Return on Investment
According to Seattle real estate expert Jim Thorpe, there is one thing that things a successful real estate portfolio, the ROI. Before real estate investors dive into a purchase, they assess the property’s potential Return on Investment, or ROI.
The ROI tells you how much profit you can expect to make in rental income over the long term. It’s expressed as a percentage of the cost of the investment, and you can figure it out by using a fairly straightforward formula.
To calculate the profit or gain on any investment, first take the total return on the investment and subtract the original cost of the investment. Knowing the ROI allows investors to assess whether putting money into a particular investment is a wise choice or not.
Tip #4: Consider The 1% Rule
The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.
If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals. You can use it to quickly determine how the property will cash flow or, if the property is currently unoccupied, you can use the rule to help set monthly rent to charge.
It’s important to remember that this is just a rule of thumb. It’s a good place to start, but other factors must be considered when determining how much rent to charge your tenants.
How to Calculate the 1% Rule
Calculating the 1% rule is simple. Just multiply the purchase price of the property by 1% – or, even easier, move the comma in the purchase price to the left two spaces. The result should be the minimum you charge in monthly rent. If any repairs are required of the property, you’ll also want to factor them into the equation by adding them to the purchase price, then multiplying the total by 1%.
Here’s an example for a home with the purchase price of $150,000:
$150,000 x 0.01 = $1,500
Using the 1% rule, you should find a mortgage that has a monthly payment of $1,500 or less and charge your tenants a minimum monthly rent of $1,500.
About Jim Thorpe & Summit Capital Partners
Jim Thorpe is a Seattle-based entrepreneur, , and real estate expert with over 30 years of experience in real estate development. He works to find high-demand properties in low inventory areas for both developers and homeowners alike. One of his specialties is locating single-family homes in property parcels zoned for multi-family development. His rental portfolio now includes houses, apartments, and commercial properties. Thorpe’s dedication to his business has led to city-wide growth and development in the real estate sector.
Summit Capital Partners is a real estate development and management firm that operates out of Puget Sound and is owned by Seattle real estate expert, Jim Thorpe. They work to acquire off-market real estate and specialize in developing risk-adjusted solutions, allowing an assets’ value to increase over 6-12 months. Summit Capital aims to make a difference in the community where they do business.