Scaling a rental property portfolio requires as much planning as it does money.
In many ways, planning is more important than money because an experienced real estate investor knows how to work with monetary limitations. In contrast, an unskilled investor risks squandering whatever advantages they have. For this reason, every step along the journey of scaling a portfolio is also an opportunity to become a more savvy investor, which will only help an investor in the long run.
Here are some considerations to aid growth:
1. 30 year fixed rate mortgages
With a 30 year fixed-rate mortgage, an investor will be able to pay a lower interest rate on a property, which will leave more money to reinvest.
2. Hire a property manager
At some point, an investor could have so many properties that they won't have the time or mental resources to manage them all. Depending on the property market and the level of services chosen, property management companies usually charge 6 to 12% of monthly collected rent for their services. This will usually include screening tenants, taking care of rent collection, arranging for repairs, ensuring violation of any local ordinances is avoided, and management of a slew of other issues.
3. Screen tenants
An investor should always include vacancies in their budget, but you also want to reduce vacancies or problem tenants' likelihood in general. This is where stricter criteria for residents can be helpful when screening to get the best residents for a rental property. Require co-signers and several references (preferable including their last landlord).
4. Live frugally
The income an investor makes off of investment properties should only be reinvested into business. Don't use the new income lifestyle boosts with new clothes, a car, renovating a personal residence, etc. The money could and should be saved for unexpected business costs. In general, an investor should have a savings account unrelated to the business for personal use or emergencies.
5. Gain experience
If an investors start by doing small deals, they'll learn what does and doesn't work for their personal style, and discover their niche. Successful real estate investors pick a niche, refine their skills over time, and become experts. With experience, an investor can start to look for greater opportunities.
6. Develop a network
Networking is indispensable in real estate. An investor needs to help and be helped by other real estate professionals. This way, the investor will grow their knowledge base and access greater resources like reputable contractors or great deals. The investor will also have more eyes and ears on the ground to track trends and new developments.
7. Know good contractors
Investment properties will inevitably need repairs, both big and small. For this reason, having access to trusted contractors of all kinds is a must. It is unwise to scramble in the face of an emergency or have a minor repair turn into a huge undertaking because the investor didn't have the right contractors already in mind.
8. Find alternative forms of funding
Because conventional lenders look at debt to income ratio, eventually, an investor will have to move on to commercial loans or use other forms of financing. Yes, a family member or spouse can take the loans out in their name, but eventually, the investor will run into the same issue. Having an extensive network can make finding funding easier.
9. Take your time
Avoid shortcuts or trying to scale investments too quickly. An investor can burn out, make poor decisions, compromise your resources, or leave yourself vulnerable to emergencies. That's why having a reliable network, knowing good contractors, reinvesting in the business, gaining experience, and being frugal are essential.
Investing time in learning through books, podcasts, webinars and online forums are also essential activities.
10. Time management
The more properties in an investors portfolio, the more time will be demanded of you. Even while using a property management company, an investor can still save time in other ways. Hire a real estate CPA. Use online rental payment software to reduce late payment and tenant tensions/interactions.
By adequately delegating responsibility, an investor have more time to focus on the tasks that cannot be delegated, like ensuring the business is running well and meeting the investors goals.
11. Don’t be bound to a single market
Don't be afraid to look at properties around the country. There are all sorts of opportunities out there. The best deals may be far away. And don't worry about managing units from afar because there are plenty of services and tech solutions to the problem of distance.
Not limiting oneself by geography also allows the investor to diversify their portfolio and become a more resilient investor. That's because if all investment properties are in the same place, they're exposed to the same risks. If a large employer shuts down or a weather disaster occurs, all of your properties may be compromised.
If an owner have investments across the United States, they're less likely to endanger all their real estate investments at once. It is important that you create a rental property investment plan to develop a strategy and choose the market that aligns best with your goals.
Refinancing can provide more favorable loan terms and free up more resources to reinvest into your business.
13. 1031 Exchanges
A 1031 exchange allows an investor to avoid paying capital gains taxes. A 1031 exchange requires using the profits from the sale of an individual properties to purchase another property (or properties) of equal or greater value within 180 days or before the due date of your taxes, whichever comes first.
14. Partner with investors
To lessen the financial burden and stress, an investor can work with one or more investors. This has both its pros and cons. While partnering may make it easier to scale a portfolio, it also decreases your income. Additionally, if the partner(s) decide they no longer want to invest, the owner will have to restructure their business.
15. Use private lenders
A private lender provides loans secured by real estate or a promissory note. While they charge higher rates, private lenders are known to offer loans that banks may shy away from, like rehab loans. They can also provide loans more quickly and with less documentation than banks.
These private money lenders serve an essential function for real estate investors because sometimes an investor needs money right away. This can be particularly important when you need the cash to get a new property right away since a private lender can cover 80 to 90% of your purchase price.
16. Consider a HELOC
A home equity line of credit (HELOC) is a 2nd mortgage where the home is the collateral. It's almost like a credit card with simple interest. An owner can take out money up to a certain amount using a bank transfer, card, or check, repay it, and make more withdrawals. A HELOC can be useful when you need additional funds to close a deal or make an emergency repair.
17. Find your target markets
Dig deep into the specifics of a desired target market. Look at jobs, median income, and home formation. By studying the area in which you're interested in investing, an investor is able to find residents more effectively and cater the marketing accordingly. Looking at school rankings and how desirable the area is to new families can help find long term occupants.
18. Budget for big repairs
If the house an investor looking at has a roof over 15 years old, it is best to replace the roof right away because it's reached its best-by date. Don't ignore major repairs because they're only going to compromise your ability to find occupants and may also lead to higher costs if neglected for too long.
An investor can't rely on residents to alert them as to when serious job is in order. Some examples of big budget repairs would be roof replacement and/or HVAC replacement. Consider these when budgeting!
19. Keep good records
An investor will want to keep meticulous records of expenditures for both tax purposes and general budgeting. Additionally, knowing past spending habits can help scale more effectively because the monetary benchmarks for before acquiring a new property will be clear.
Scaling an investment portfolio is a matter of skill.
With each new property an investor acquires, the challenge of managing your business becomes greater. Every investment comes with its unique challenges, which will only sharpen your skills. The deeper an investor dives into real estate investment, the more capable they will be at growing and maintaining your properties.
It's just important to remember that no one invests alone, even if they're the sole owner of their business. That's because a growth minded investor is always working with and learning from others.