While both earning and savings are an important part of your finances, just the two alone won't cut it to achieve a high net worth. Investing wisely, letting the money grow, and making the money work for you are essential to success. Both the stock market and real estate market offer this opportunity. In this article, we will focus on real estate and discuss tips to grow your real estate portfolio.
We also have a detailed guide on reaching your long-term financial goals with real estate.
For someone interested in building their wealth through residential real estate, just one property alone may not cut it. Here is an exception where you might get lucky. After you buy a property, if a happening industry decides to put a hub near your property, you might experience an exponential growth. In developing countries and even in some developed countries, this is not an uncommon phenomenon. When a new airport is announced, it drives up the property value. Likewise, tech companies moving to a particular neighborhood increases the desirability for residents seeking easier commute. In situations like this, it is not uncommon to see the property value go up by 30% or even 10X depending on the location. Some people have cashed out and retired based on this proceeds. However, this is not a common occurrence for most of us. We have to focus on building wealth, one property at a time.
In the real estate business, this is often referred to as the number of doors you have. While this alone doesn't paint the full picture, as one door in San Francisco costs as much as 100 doors in other parts of the world. You can learn more about this in our articles on cash flow vs appreciation and investing in expensive locations. How many properties do you need to achieve a high net worth? Well, the answer depends on you. You have to decide what your target number is and work backward based on your location. Here's an example:
Your target net worth in today's dollars is: $1,500,000
Average house cost for your target neighborhood is: $300,000
Number of houses to own = $1,500,000 / $300,000 = 5 houses
Having more properties helps you to diversify your risk within real estate. A stretch goal might be to generate income streams from residential and commercial properties. Even if one tenant falls short on the rent for a few days, the income from others can keep you going. Your focus should be on growing your portfolio to build equity, force appreciation where possible and reasonable, and reduce risks. Let's also be the first to point out that life seldom goes according to plan. Having a plan helps you to move in the right direction even if you don't always meet the timelines you have in mind. There are several steps you can take to achieve a wide and diverse portfolio.
Research and learning##
To be confident in your investments, read, research, and analyze every source of information about the real estate market before investing. If you can, pay a visit to the neighborhoods you are considering to form your opinion. Soak up as much information as you can from books, podcasts, websites, or blogs. You are already taking the right step by being here at HomeKasa. All these can help you tremendously to make an educated and informed decision. We also recommend that you read some of our selected articles here:
What some realtors do not tell the customers about the property they are showing is the class. While there is no exact formula for the classification, there are 3 classes of properties - Class A, Class B, Class C. They go from new construction, well managed, and located in high-income neighborhoods to progressively less so. Class C properties might not be in a great location, but offer better rent returns for the associated risk and lower long-term appreciation. You have to decide the class based on your risk profile, your tolerance for dealing with different types of neighborhoods, your expected appreciation, etc. In general, owning more doors and getting better cash flow is typically associated with Class B or Class C properties.
Buy a Class C property, renovate, rent, refinance and repeat again##
Properties that are not at prime locations, need renovation, or even have damages are Class C properties. Because of the risks and less desirability, these properties are usually cheaper. One option is to buy properties that need to be fixed at a lower price than the market rate. By fixing the issues, you can add to the value of the property. Some issues may need to be addressed right away, while others can be done in due course. A thorough analysis of the expenses is required for these Class C properties or for any property for that matter. This analysis enables you to make an informed opinion on your purchase price so that you can cover all your repair expenses and still have some leftover for the risk and trouble you take on. Once you address the repairs, you can rent the place and start growing your cash flow. The equity boost in your house gives some cushion too.
Class A properties demand a premium because of the location, the condition of the property, and relatively lower risks. Unless you expand the property by adding square footage, it is hard to add significant value to the property in the short-term. Class B properties on the other hand are in between Class A and Class C - they offer a decent option if you want lesser repairs and a better neighborhood. However, these are already in demand and competition that won't give you much of a discounted rate.
Lookout for below market value properties##
Hunt and acquire those properties that are priced below the market value. These properties are usually in the market for sale for a long period, need repair, or have other issues. Also, keep an eye out for a seller looking for an emergency sale. In all these situations you can negotiate to get discounted properties. Your realtor is your partner in finding and bringing these deals to you.
Scrutinize good rental performance##
Find out how easy it is to rent a property. If the location is hard to rent, you'll have cash flow issues. Properties that are close to amenities, restaurants, education centers, job locations, or hospitals can usually be rented quicker.
Evaluate your potential returns##
After you shortlist your property, it is important to check the valuation and rental income generated by similar properties in the market. Identify all the monthly expenses and the expected income to calculate cash flow. You can read more about how to set rent here. You can also perform a cash-on-cash return analysis to know how much cash return you are likely to get. These help you to evaluate and identify a relatively stable financial option.
Diversify your real estate portfolio##
Putting all your eggs in one basket is not a safe investment strategy. The market can fluctuate causing some temporary and some permanent damages to the investment, regardless of the investment vehicle chosen. Read more about whether stocks or real estate is better for you based on your behavior. Diversification is an important aspect of any investment strategy. Within real estate, consider investing in different types of properties. For example, during the Covid-19 pandemic, many commercial real estate properties are taking a hit. You can hedge your risks by diversifying locations, selecting varied asset classes like single-family property, multi-family apartments, commercial real estate, or REITs. Even if some of your asset classes were to be affected by negative market sentiments, other asset classes could keep you going.
Manage your properties##
As you begin accumulating more properties in your portfolio, managing these properties can become cumbersome. By using HomeKasa property management software, you can automate tenant screening, rent collection, move-in and move-out checklist, and more. This frees you up to focus on growing your portfolio instead of dealing with the grunt work of property management.
In addition to managing the tenant lifecycle, HomeKasa can be your one-stop solution to handle all your property owner tasks such as paying HOA, renewing insurance, reminding you about tax dues, scheduling repairs and many more. It will help you manage your properties with cutting edge technologies like artificial intelligence, machine learning, cloud-based technology with high-level data analytics. You can manage your properties like a business - look at the profit and loss and see which properties are profitable and which ones aren't.
Use real estate investment tools and analytics##
Let's face it - investing involves math. You've to understand the amortization, know how much interest vs principal you'll be paying for different loan terms, and even figure out if it is worth refinancing. What happens when you make extra payments - how does that reduce your total interest paid and how soon can you pay off the mortgage? We make this entire process easy for you with the best amortization calculator in town. You also need to stay on top of your cash flow, cash-on-cash return, capital rate, rental income, monthly expenses, insurance dues, tax calculations, etc. It is very easy to drop the ball one something even if this is your fulltime job. Take advantage of the software to do these for you with friendly reminders and easy to understand charts.
Lay down your clear objectives and investment criteria##
Like any other business, you need a well laid out business plan for your real estate investment business too. A proper financial plan, investment goals, and investment strategy are what will make you succeed. Even if you have the best plan in place, nothing can happen unless you execute. Get started on your investment properties! 10 years from now, you might look back at the decision and realize it how it set you on the path to your financial freedom.
First, you set your business goal. Are you interested in long-term appreciation or want to generate a regular cash flow income right-away? How many properties will you need to achieve your net worth goals and financial freedom? These achievable, measurable, and specific goals will guide you to make appropriate decisions and to track your success.
In addition to these, the financial plan would help you to know your source of income to invest in your property. How you would source your money to pay down payments, repair cost, monthly operating expenses? Do you have saved money or you would take equity out of your investments to fund further purchases? Will you be buying your property with cash? If your property is in an expensive location and won't break even in the short-term, how do you plan to cover the gap?
The investment strategy will help you to know how you would achieve your set goals. You may choose one or more investment strategies such as buy and hold strategy, or fix-and-flip strategy.
With an investment strategy and a well-crafted financial plan, you can plan your present and future, and grow like a pro.
We provide you with all the tools and information you need to be successful in real estate. We also recommend talking to a realtor who is also an investor so that they can share their experience in your target market whether it is local, or long-distance, or even a college town. Many people think about investing in real estate, but seldom take the first step. Get started with your real estate investments with all the information, guidance, and the best tools offered for free by HomeKasa to grow your portfolio and design your financial freedom.