Self-made success stories often have a common theme: real estate. There’s just no denying that it’s one of the wisest long-term investments you can make, because it has it all. Rental property delivers cash flow, appreciation, diversification, equity growth, leverage—and it’s a tangible asset you can actually see grow by the square foot. Incorporate these tips for developing a real estate portfolio into your financial strategy.
Have a Plan
There are a lot of unknowns when you’re buying property, but you do know your goals. Outline your objectives: Supplemental income? Financial independence? Early retirement? Paying off your children’s college tuition? Detail what type of returns you’ll need to get there, and how many properties you’ll need to do it. Err on the side of caution by underestimating your returns and overestimating your losses.
Save. Then Save More.
You’ll probably need about a 25 percent down payment, and more to pay for the legal costs of buying a property. When you’re crunching numbers, make sure you’re never buying more than 100 times what you’ll be charging for rent. For instance, if you’re planning to charge $800 for rent, you shouldn’t pay more than $80,000 for the property. Get realistic estimates of what repairs and maintenance will cost you, and aim to set aside 20 percent of your profits to reinvest. It’s daunting, but it’s better to know your limits before you get in over your head. Even if you can technically afford something, it’s often smarter to hold back some funds for unexpected costs.
Do Your Homework
Once you’ve focused on a potential area, gather some numbers that you can compare to other areas. No property has it all, but you should make sure it has plenty of selling points for potential tenants. You can find a lot of the information online, or work with a local real estate agent. Look into:
- Comparable sales figures
- Comparable rental rates
- Unemployment rate
- Median income
- School district ratings
- Current population
- Projected growth
Put in Some Legwork
Numbers are solid, but they don’t give the whole story. Walk the area yourself, chat up some neighbors, and look at it through the eyes of a renter. Look for:
- The state of other properties
- Too many vacant lots
- The quality of nearby shopping
- Entertainment options
- The dining scene
- Fitness clubs
- The proximity of public transportation
- Projects in development
Keep It Professional
It’s easy to fall in love with a property because it’s charming or reminds you of your childhood. Stop—this is not the time to get sentimental. Be objective, be cold if you have to. This is strictly a professional relationship, and you’re not going to get sidetracked by a little curb appeal. Stick to the facts from your research, not your feelings.
Expand Your Network
It helps to compare notes with others who have an interest in real estate, especially those with experience. You’ll find that other investors, property managers, and real estate agents can inform your understanding of the market. You can ask them for advice, hints on strategy, and second opinions. For a lot of people, real estate is a hobby, so join the club.
Consult with Experts
If you’ve worked up some numbers for your investment, run them past your money guy, or find an accountant who is specialized in real estate. Have a lawyer look over your proposed lease agreement, and explain fair housing laws to you, as well as tenants’ rights and other regulations that may be new to you. Seek out professionals with local expertise who have a strong grasp of the pros and cons of the area. At R. Russell Properties, we’ve been in property management in Orange County, Florida for a few decades, and have watched it develop. When we hear that a great deal has just come on the market, we let our clients know immediately.
Use Other People’s Money
Know your options when it comes to financing your property. The better your credit, the better rate you can get on a mortgage. Don’t overcommit your own money, especially on the first property. Instead, use loans and mortgages to preserve your own wealth.
One Property at a Time
Whoa there, cowboy. When you’re researching a property, you might come across others that catch your eye. Focus. Learning all you can about a property takes all your concentration. Adding another property is twice the work—and even more, once confusion sets in.
Investing in rental property depends on a human element for success. That’s why it’s key to screen candidates thoroughly to find the right tenant. And after that, you’ll need to keep maintaining and improving your relationship. When a tenant is happy, and a landlord is happy, you can expect the property to stay occupied and fruitful with less turnover. Like any relationship, though, the tenant-landlord union requires work. If you’re not up to the challenge, you can delegate much of the day-to-day responsibilities to a property management company.
Keep the property in peak condition and you’ll be able to attract more tenants and charge more rent. When you sell it down the road, those incremental improvements will raise the value of your property. It doesn’t have to be a dramatic renovation—often just a little elbow grease now and then will go a long way.
Reassess Your Strategy
As you add properties one by one, you’ll get more comfortable with the flow of expenses and responsibilities. Take a breather and revisit the big picture for each investment, because there’s always room for improvement. How can you be more efficient? Where can you save more? How can you maximize profits? Investments don’t just grow in the wild; they need careful tending. With a larger portfolio, you’ll find you have less time, so make sure you’re working with the best property management companies for the money. Many investors employ the “snowball method”: they take the profit from one property and roll it into another. Then, do it again, keep rolling, and your portfolio will get much bigger and more well-rounded.
Diversify Your Investments
Once you’re having success as a landlord, it’s tempting to want to add properties in the area you’ve become familiar with. That’s one argument, and people have had success with it. But many experts have this tip for developing a real estate portfolio: cover your bets. If one neighborhood or market takes a hit, you can depend on other investments to keep you afloat. You can lower your risk exposure by trying another type of real estate, or investigating an up-and-coming district. You’ll have to start over with research, but it’s worth it to have properties in different housing markets.
At R. Russell Properties, we’ve been advising our clients for decades on the most promising possibilities in central Florida. If you’re interested in expanding your portfolio, contact us for more information on how we can help.