Tips For Building a Real Estate Portfolio (For Beginners)
If you’re reading this blog post then we want to congratulate you. It’s not easy to get started investing in real estate and the most important step is to make the decision that you want to start. Once you’ve closed on your first deal, you’ll find that the process gets easier and easier. Imagine this scenario for a minute:
You have been saving money for a down payment on a rental property. Every month you put away almost $500 and after a year and a half you have approximately $10,000. You close on a cheap property that generates another $500 in rental income after expenses. Now, in addition to your savings, you earn another $500 from your property. Now you save $1,000 per month and it takes you half the time to save another $10,000. You buy a second property that generates $500 per month. You’re now saving $1,500 per month.
You can see where this analogy is going. Building up a real estate portfolio is a little bit like a snowball rolling down a hill. It starts small but as it rolls, it collects more and more snow. The bigger it gets, the faster it starts to grow. This is what we want to help you do with your personal finances.
These are our tips for building a real estate portfolio (for beginners).
Benefits of Real Estate:
There are lots of reasons that investing in real estate is so popular. Historically, it’s been one of the most common investments and with good reason. If you can build a solid real estate portfolio, you will set a strong foundation for your finances. You’ll also find that have a lot more control and options when you’re in control of your portfolio.
Here are a few of the reasons that real estate is such a beneficial investment:
- It can be very lucrative
Owning real estate, a little bit like owning a stock, will give you a return on your money in three ways. First, real estate appreciates in value. It’s very common to buy a piece of real estate for several years and discover that the price has gone up. You can buy and hold real estate just to sell it at a higher price in the future.
Second, you have the ability to add value to a property. With a stock or bond, there really isn’t anything that you as an investor can do to increase the stock’s value. However, there are virtually unlimited ways that you could increase the value of a property that you own. For example, you could add another bathroom or living room, update appliances, install new countertops, repaint the exterior, or install new plants in the yard. Whatever you can think of to make it a nicer place to live will increase its value for you.
Third, real estate can be a lucrative investment because (if you plan on renting it) you can earn money every month in the form of rental income. This is very important because it drives cash flow. This cash flow is what will allow you to purchase more properties in the short term (which drives even more cash flow).
- Lots of control
As mentioned, as the owner of a property you have total control (for the most part). There are some restrictions set in place by the local and federal governments about what you can/can’t do. However, for the most part, your rental property is yours to do what you see fit. If you want to fix it up and sell it at a profit, go ahead. Considering you would like to tear down the existing building and build something else, that’s fine too. If you want to keep it as is and just collect monthly rent, good for you.
Compare this to an investment like stocks. When you buy a stock, you essentially have no control (unless you are a majority shareholder with voting rights and decision-making ability). If the management makes a terrible business decision and profits suffer, so do you. If the CEO is involved in a scandal and the stock suffers, so do you. Neither of these issues was your fault but you, as a shareholder, will still suffer.
Inflation is the steady increase in prices and the decline of purchasing power over time. This essentially just means that one dollar today will be worth much less than a dollar in the future. For example, consider how the average cost of a new car in 1950 was just $1,500. You can barely buy any car for $1,500 these days, let alone a new one. This anomaly is caused by inflation.
When we say that real estate is protected against inflation we mean that you don’t have to worry about its value deteriorating as dollars do over time. This is because, as the landlord, you can just increase the rents over time to adjust for inflation.
You’ve probably experienced this as a tenant once or twice. You get an email saying something like “Hope you are well. Thank you so much for resigning for the next year. As stated in our original lease, the monthly rent will be increasing from $1,000 to $1,100. Thank you.” This is just the landlord protecting their investment from inflation.
- It can be fun
Because of all of the control involved in owning real estate, it can actually be a fun investment. You get to decide what you want to do with the property and how to maximize its potential. This can be anything from renting it out, tearing it down and building a new one, or repurposing it into a business. The possibilities are unlimited!
- Make a difference in your community
As a landlord, it’s actually rewarding to be making a difference in the community. Even though landlords generally get a bad reputation, they are making a difference for their tenants. They provide people with one of the few things in life that are truly essential: a place to live. They give a home to people who need it and this can be a very rewarding feeling.
Different Types of Real Estate
So now that you’ve decided you want to get started in real estate, let’s go over the different types of real estate you can buy. There are really just 4 types of real estate:
- Vacant Land
Which one you want to invest in is up to your own goals. However, here are a few pros of each type of real estate.
Pros of owning residential: This is the construction and resale of homes where people live. It includes single-family homes, condominiums, townhouses, duplexes, vacation homes, etc. This is usually the easiest place to get started investing and most common to buy. However, it’s not always the most lucrative.
Pros of owning commercial: Commercial real estate includes shopping centers, retail, office buildings, education facilities. Deals are generally bigger for commercial real estate. This means prices are higher, more money is needed, more money can be made, and deals take longer to close.
Pros of owning industrial: Industrial real estate includes warehouses and manufacturing buildings. These plots of land are usually too big for a single investor to buy by themselves. However, they’re an ideal investment because tenants will sign leases of 10+ years. Compare this to owning residential real estate where you might get a new tenant every year.
Pros of owning vacant land: Vacant land is just anywhere where nothing is built (including ranches and farms). The good part of buying vacant land is that it’s usually much cheaper than buying a building. However, then the responsibility is yours to build some type of structure. This can be fun because you’re building something from the ground up but it is also significantly more work.
How To Get Started
When getting started, there’s an old saying that goes something like this:
“Don’t go looking for money. Find a good deal and then money will find you.”
This means that you don’t necessarily need to worry about not having the money to buy a property. What most people don’t realize is that you only need to pay for a fraction of the property anyway. The rest will be financed by a third party lender. This is especially true when the you start dealing with property values that are in the millions.
Instead, we’d recommend focusing on finding a deal.
Research, Research, Research
This is the most important step when doing a real estate deal. You want to be 100% sure that the numbers behind buying real estate are rock solid. The last thing that you want to happen is to finally close on a property only to find that the market rent isn’t high enough to cover your expenses. If this happens, you can end up losing money each month.
Some things to look for while researching:
- Are there other buildings in the area? Are lots of them for sale? This might be a bad sign if lots of people are selling in your area.
- What is in your area that would draw a tenant in? Are the schools in the area good? Is the property close to a popular city? Is it near the great outdoors?
- Figure out if the property close to public transportation. This can play a big role in whether or not someone decides to move in.
- What are some other similar buildings in your area and what do they charge for rent?
- Is there the potential to add value to your property?
- Has the building traditionally been rented in the past? Why or why not?
- Keep an eye out for a deal! Once you decide that you want to buy real estate, start looking around during your daily activities for places for sale or places you think are valuable. Simply paying attention is one of the best ways to find a deal.
Good Resources To Use
Some of the most common resources that you can use to research investments are most likely things that you’ve used before.
Google Maps – You can use this to scope out properties virtually. You even have a street view to size up the area without physically having to go there.
Apartments.com – You can use this for research to see what similar properties are charging for rent in your area.
Zillow – Another great place to go for information. You can see what places are for sale, compare property values, research comparable properties, etc.
Costar – This tool requires a subscription but it’s one of the best places to go for information on commercial real estate.
We hope that you found this valuable as you begin your journey as a real estate investor! We want to leave you with one last thing to remember. When you’re investing, there are always a million and one reasons not to take action. It’s not the right time for the market. You don’t really have the money. You haven’t done enough research yet.
Sometimes, you can research investment opportunities until the sun burns out. There are always other factors to analyze. However, all this research is useless if you don’t put it into action. Once you’ve satisfactorily examined an investment opportunity and are confident it will provide you a solid return, take action and buy it.
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