Scaling your 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 your portfolio is also an opportunity to become a more savvy investor, which will only help you in the long run.
Here are some considerations to aid your growth:
1. 30 Year Fixed Rate Mortgages
With a 30 year fixed-rate mortgage, you'll be able to pay a lower interest rate on your property, which will leave you with more money to reinvest.
2. Hire a Property Manager
At some point, you'll have so many properties that you won't have the time or mental resources to manage them all. Depending on the market your property is in and the level of services chosen, for 6 to 12% of your monthly collected rent a property manager will screen tenants for you, take care of rent collection, arrange for repairs, make sure you're not violating any local ordinances, and manage a slew of other issues.
3. Screen Tenants
You should always include vacancies in your budget, but you also want to reduce vacancies or problem tenants' likelihood in general. This is where stricter criteria for tenants can be helpful when screening to get the best tenants for your rental property. Require co-signers and several references (preferable including their last landlord).
4. Live Frugally
The income you make off your investment properties should only be reinvested into your business. Don't use your new income to improve your lifestyle with new clothes, a car, renovating your own home, etc. You never know when your rental properties may need repair or when you might be hit with a vacancy. In general, you should have your savings account unrelated to your business for personal use or emergencies.
5. Gain Experience
If you start by doing small deals, you'll learn what does and doesn't work for you and discover your niche. Successful real estate investors pick a niche, refine their skills over time, and become experts. As you gain experience, you can start to look for greater opportunities.
6. Develop a Network
Networking is indispensable in real estate. You need to help and be helped by other real estate professionals. This way, you'll grow your knowledge base and access greater resources like reputable contractors or great deals. You'll also have more eyes and ears on the ground to track trends and new developments.
7. Know Good Contractors
Your properties will inevitably need repairs, both big and small. For this reason, having access to trusted contractors of all kinds is a must. You don't want to scramble in the face of an emergency or have a minor repair turn into a huge undertaking because you didn't have the right contractors already in mind.
8. Find Alternative Forms of Funding
Because conventional lenders look at your debt to income ratio, eventually, you'll have to move on to commercial loans or use other forms of financing. Yes, you can have a family member, like a spouse, take the loans out in their name, but eventually, you'll run into the same issue. Having an extensive network can make finding funding easier.
9. Take Your Time
Avoid shortcuts or trying to scale your investments too quickly. You 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 your own 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 you own, the more time will be demanded of you. Even if you're using a property management company, you 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, you'll have more time to focus on the tasks that only you can do: making sure your business is running how you want it to and meeting your goals.
11. Don’t be Bound to a Single Market
Don't be afraid to look at properties outside of your immediate geography. 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 yourself by geography also allows you to diversify your portfolio and become a more resilient investor. That's because if all your 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 you have investments across the United States, you're less likely to endanger all your real estate investments at once.
Refinancing your properties can give you more favorable loan terms and free up more resources to reinvest into your business.
13. 1031 Exchanges
A 1031 exchange allows you to avoid paying capital gains taxes. To perform a 1031 exchange, you must use the profits from the sale of one of your 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 your financial burden and stress, you can work with one or more investors. This has both its pros and cons. While partnering may make it easier to scale your portfolio, it also decreases your income. Additionally, if your partner(s) decide they no longer want to invest, you'll have to restructure your 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, you need 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 your home is the collateral. It's almost like a credit card with simple interest. You 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 your target market. Look at jobs, median income, and home formation. By studying the area in which you're interested in investing, you're able to find tenants more effectively and cater to your marketing. Looking at school rankings and how desirable your area is to new families can help you find long term occupants.
18. Budget for Big Repairs
If the house you're looking at has a roof over 15 years old, you're best off just replacing 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. You can't rely on your tenants to let you know when a serious job is in order.
19. Keep Good Records
You're going to want to keep meticulous records of your expenditures for both tax purposes and general budgeting. Additionally, knowing your past spending habits can help you scale more effectively because you'll know the monetary benchmarks you need to hit before acquiring a new property.
Scaling your investment portfolio is a matter of skill.
With each new property you acquire, the challenge of managing your business becomes greater. Every investment comes with its unique challenges, which will only sharpen your skills. The deeper you dive into real estate investment, the more capable you'll 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 you're always working with and learning from others, and that's key to becoming the best investor you can be.
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