Most intelligent investors and financial managers understand the power of real estate as an investment. With the right moves, you could easily multiply the value of your initial investments while capitalizing on a steady flow of revenue from rental income. And if you invest in many different types of real estate, you’ll minimize risk and benefit from natural portfolio diversification.
If you want to scale up your earnings and make your money work for you, it’s a good idea to gradually expand your real estate portfolio. But how do you do this while minimising upkeep and expenses?
The Goals of Real Estate Portfolio Expansion
Ultimately, expanding your real estate portfolio is a move focused on the following goals:
- More revenue/profitability: With all other factors being equal, a bigger real estate portfolio is a more profitable one. If you currently have a property that generates US$5,000 of net profit for you in a year, adding another property to your portfolio that’s similar should increase your yearly net profit to US$10,000.
- Mitigated risk: You’ll also need to think about how your portfolio expansion affects your risk levels. If done properly, investing in more real estate can actually reduce the amount of risk you face as an investor; if handled poorly, it can greatly increase your risks.
- Minimised effort: Adding more properties, and more complex properties, can significantly increase the amount of work needed to maintain your real estate portfolio. Your time isn’t infinite, so it’s important to plan to minimise the effort you need to spend as well.
The Best Strategies for Expanding Your Real Estate Portfolio
With these goals in mind, these are some of the best strategies for expanding your real estate portfolio.
- Consider starting in the same neighbourhood: One possible angle of attack is to invest in multiple properties in the same neighbourhood. There are a few advantages inherent in this method. For starters, you already know this neighbourhood; you’ll have a much easier time researching new properties and you’ll know what to expect in terms of property costs, local laws, and average rent prices. Additionally, you’ll have more control over the reputation and desirability of the neighbourhood; if you maintain all your properties well, and you keep all your tenants happy, you’ll attract even more tenants to the neighbourhood.
- Eventually expand to other areas: That said, investing in only a single neighbourhood isn’t good for your portfolio in the long term. Eventually, you’ll want to expand to other neighbourhoods and other cities. That’s because each area exists in a unique real estate environment, and exposing yourself to multiple different areas is a much better way to mitigate risk. If any single neighbourhood tanks in value, your portfolio won’t take massive losses.
- Hire a property management team: How do you manage multiple properties all on your own? The simple answer is that you don’t. If you want to minimise the effort you spend managing your properties, finding and screening new tenants, and dealing with all the little issues that come up, you’re better off hiring a property management team. That could mean working with a property management firm or building your own company and hiring employees to work for you. It all depends on how much you’re willing to spend and what your current needs are.
- Invest in both single-family and multifamily homes: Single-family and multifamily investing are both valid options in the real estate world. Multifamily homes generally have built-in risk mitigation, since they have multiple tenants simultaneously and face fewer vacancy risks, and they also generate more income, but we need to keep in mind that these homes are also more expensive and harder to manage. Try to include both in your portfolio if you can.
- Invest in both residential and commercial real estate: Similarly, you can diversify your real estate portfolio by investing in both residential and commercial properties. Residential and commercial property investments carry unique strengths and weaknesses that balance each other out, so try to dabble in each area if you can.
- Don’t rush your buying decisions: Timing is incredibly important in the real estate industry. In the span of a few weeks, a handful of factors like interest rate movements, general economic conditions, and job opportunities in the local area could cause house prices in a neighbourhood to spike or plummet. Even if you have the money to spend right now, exercise caution and restraint by taking your time with each new purchase added to your portfolio.
- Put your extra cash in REITs: Real estate investment trusts (REITs) are investments that work much like stocks, giving you the convenient ability to get exposure to the real estate market. If you have extra cash, but there aren’t any especially valuable properties to add to your portfolio at the moment, consider putting your extra cash here. Practice dollar cost averaging (DCA) to keep your costs at a reasonable level — and make sure you invest in other asset classes as well.
As you continue investing and expanding your real estate portfolio, you’ll learn more about how the real estate market fluctuates in your area, you’ll refine your own goals, and you’ll eventually master the art of portfolio balancing on your own. Keep learning and making adjustments so you can keep improving and seeing better returns.
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