If strategically leveraged, rental properties can produce some of the best cash-on-cash returns of any investment. Best of all, almost anyone can get started with just a little cash and a disciplined strategy.
And while one property is better than no properties, the real value lies in creating an entire portfolio of properties that can generate thousands of dollars in semi-passive income for the rest of your life.
4 Tips for Building Your Portfolio
All you need is four or five properties in your portfolio and you can realistically generate several thousand dollars in monthly income.
Here are a few tips to help you add properties in a profitable and scalable way:
1. Know What You’re Looking For
It’s helpful to niche down. In other words, pick a specific type of property and become an expert at finding and evaluating these deals. Examples include single-family properties, multi-family properties, duplexes and triplexes, distressed properties, mobile homes, condos, etc.
It’s also important to get clear on the financials. What ROI are you looking for? What monthly cash flow do you want? What price range are you looking for? Is the goal to rent as-is or rehab first?
By finding a specific niche and setting crystal clear guidelines upfront, you don’t have to spend nearly as much time evaluating deals when they come across your table. You’ll know within minutes if it’s something you’re interested in.
2. Be Conservative With Your Numbers
It’s easy to fall in love with a property, but you have to take emotions out of it. Look at each deal objectively through the lens of numbers and data. Most importantly, be super conservative. This means:
Always account for at least four to six weeks of vacancy per year
Assume your rent will be 10 percent less than the going rate in the market
Account for annual repairs equal to five percent of the property’s value
This might seem like overkill, but it’s the surest way to find a good deal. The chances that you’ll actually have six weeks of vacancy and only be able to charge 90 percent of the going rate while also having to fork over thousands for repairs each year is highly unlikely. If it happens, you’ve already factored it in. If it doesn’t, your cash flow just got a lot better.
If 100 deals come across your desk, you’ll probably ignore 90 of them right off the bat. Out of those other 10, it’s possible that just two or three actually make sense when you run the numbers. You have to be discerning. Patiently waiting for the right deal is always the right move.
3. Be an Investor, Not a Landlord
Most newbie rental property owners make the mistake of spending their time doing the tasks of a landlord, when they should really be acting as an investor.
The best thing you can do is hire a property manager to oversee the day-to-day operations of your rentals. This frees you up to focus on big-picture tasks like finding new properties and optimizing cash flow.
A good rental property manager will handle tasks like property management, property marketing, repairs and maintenance, tenant screening, rental collection, bookkeeping, professional photography, and even eviction services.
4. Reinvest and Hold
As the equity in your properties increases, it becomes very tempting to sell and make serious cash. However, this is a very shortsighted view. Yes, you can make good money doing this, but it’s the long-term cash flow that’s most important. Real estate values will continue to go up over the next couple of decades. You’re better off holding, paying down your mortgage, collecting the cash flow, and then reinvesting in additional properties.
The real value of being a real estate investor comes from the compounding effect. It might take you several years to add two or three properties to your portfolio. But as the cash flow increases, you’ll eventually be in a position where you can add several properties per year. At this point, a six- and seven-figure semi-passive annual income becomes a very real possibility.
Adding it All Up
If you want to become a millionaire, real estate is the surest path. All you need is a few thousand dollars to get started (and a willingness to learn). Use the tips in this article to begin building your own real estate empire!