Real estate investment is a great way to earn income and build wealth. But building a real estate investment portfolio is a challenging task. It requires discipline, research, and a strong business plan. Once you have a solid property portfolio, you will be able to earn a steady income from your real estate investment.
In this article, we will discuss some of the tips and strategies to help you build a solid real estate investment portfolio.
Build Cash Flow into Your Investment Portfolio
Most experts suggest that you buy properties with an expected return of eight to 10 percent per year. However, if you are looking at a property that costs $100,000, it may be worth it to only buy if you can get it for $80,000.
The goal is to build cash flow into your portfolio, so you can get a return without needing to take on the risk of buying a property that is priced too high.
Understanding Rental Property Loan
A rental property loan is the best way to get your hands on the cash you need to buy property. Most lenders will require at least a 20% down payment.
However, if you can’t come up with the cash for the down payment, you can take out a mortgage or a home equity line of credit (HELOC) to get the money you need. If you are able to get a rental property loan, make sure to use it wisely and build in the appropriate amount of time for appreciation. If you don’t use your rental property loan wisely, your cash flow can become a liability.
Don’t Flee the Market
It is important to understand that the real estate market is always changing. If you are looking at investing in real estate, it is best to stay on top of the changes in the real estate market so you don’t miss out on an opportunity.
For example, if you’re looking at purchasing in an area that has recently seen a rise in interest rates, check whether the interest rate has risen in your area as well. If it has risen, then it might be worth jumping on the opportunity to invest in that area now.
Buy Low and Sell High
Another strategy is to buy and hold properties for long periods of time. This is known as the buy-and-hold strategy. The idea is that if you can purchase properties at a low price and hold them for years, you will be able to sell them when they become more valuable. The strategy works best if you buy properties in areas that have low vacancy rates.
If you can find four or five properties with great potential in an area where vacancy rates are low, then you can make great returns on your investment over time.
Keep in Mind the Four Percent Rule
The four percent rule is an estimate of what your return should be on your investment when you are buying properties with a 20 percent down payment. The rule says that you should expect to make four percent in appreciation on your investment (i.e., get four percent per year for 20 years). If you buy a property for $100,000, you should expect to make $4,000 per year from appreciation. If you buy two of those properties and hold each one for 20 years, you should expect to make $8,000 per year from appreciation (i.e., $4,000 per year for each of the two properties). The rule also says that if you buy three or four properties at once and hold them for 25 years, then you should expect to make six percent per year from appreciation (i.e., $4,000 per year).
If you have low-interest rates or no interest rates at all on your purchase loan, then this strategy works really well. It is also ideal if you are looking at buying properties that have recently appreciated because they may have appreciated more than the four percent rule suggests.
Rent Your Property as Part of Your Business Model
Rental income is one of the best ways to generate cash flow into your portfolio. Even if you do not intend to sell your property anytime soon, renting your property can help you build cash flow into your portfolio while still generating additional income from your investment property. You could even use that rental income to help finance your next purchase or invest it in stocks and bonds that are likely to yield higher returns than rental income.
Set Up a System to Handle Paperwork, Fundraising, and Administration
If you want to save money on paperwork and administration when it comes to buying or selling real estate, then it will be a lot easier if you set up a system for handling all of that paperwork yourself. You might even want to use automated software or an online platform so that everything is done online and there are no more trips to the bank or other banks for paperwork or processing fees. You should also consider hiring a real estate agent if you want someone else to handle the paperwork and administration for you (as long as they are licensed).
By following these tips, you should be able to build a solid real estate investment portfolio that can provide steady income and allow you to grow your wealth over time.