You’ve bought that first rental property. You filled it with tenants. You even enjoy a positive cash flow. Congratulations! You’re a successful real estate investor.
But what does it take to develop a portfolio? The most successful real estate investors know how to scale their early success and add more properties.
Adding more properties can be challenging, though. At HUNTAHOME, we are the full-service DFW property management firm that can also help clients identify and add the best Fort Worth and Dallas homes for sale to their portfolios.
We’ve found through the years that building a portfolio doesn’t have to be as challenging as it first appears. Follow this 7-step process for moving from one property to two, and you’ll be able to build your portfolio and grow your business for years to come.
1. Create a Plan
Start with simple objectives. What do you want to accomplish through your real estate portfolio? Do you want to have a monthly cash flow of $5,000? Do you want to someday divest so that you can pay for your kids’ college educations? Do you want to leverage a real estate portfolio to retire early?
No matter what you want to accomplish, put it down on paper. And then create a plan around those objectives. Nos. 2–7 listed below will help you put details behind that plan.
2. Get to Know the Market
You need to become an expert on your market. You need to gain an understanding of different neighborhoods and locations. You need to gain an understanding of rent-ability in those areas. You need to be able to quickly evaluate the expenses associated with ownership in a given area, as well as the appreciation potential.
And then the good part: You need to develop a system for quickly scanning what’s on the market and efficiently evaluating various opportunities. There’s a reason why some properties pop onto the market and then quickly pop off — they offer real value. And there’s a reason why some properties never make it to the MLS — they represent rare opportunities and enormous value.
3. Know What Value Looks Like
The due diligence process should lead you toward value. Where are the best places to find value? Look for bargains in these three areas:
- Near Foreclosures: Banks don’t want to own homes, and owners don’t want to be foreclosed upon. Look for properties in your area that are near foreclosure, as they are often available at a steep discount.
- Distressed Owners: Even if a property isn’t nearing foreclosure, it may still be available at a discount — if its owners are motivated. Search online listings and marketplaces like Craigslist, and look specifically for terms like “motivated seller,” “must sell” and “all offers.”
- Wholesalers: Real estate wholesalers often operate in large markets (like the Dallas-Fort Worth area). If you can develop a relationship with the right wholesaler, it could jump-start your effort to build a portfolio.
Layer these three areas into your evaluation system. As you quickly scan the market each day, find ways to identify pre-foreclosures, distressed owners and wholesalers who are often buying and selling in your area.
4. Optimize Your Existing Properties
You don’t need positive cash flow with your existing property to build a portfolio — but it sure helps. When you want to move from one property to two and beyond, find a way to get your existing property to a positive cash flow.
Sounds easier said than done, right? Get creative by making small-investment-big-bang updates that can help you increase rent levels. Or, you can always consider refinancing for a lower monthly payment (more on this below).
5. Leverage Your Existing Properties
You have equity sitting in your existing rental property. Leveraging it to buy your second is one fast way to expand your portfolio. For example, if you owe $180,000 on the loan used to buy your first property, but the property itself appraises for $300,000, you have $120,000 in equity. In Texas, you can only borrow up to 80% of a home’s value ($240,000 in this case), which means you have $60,000 to work with and flip toward another home.
You can also consider a 1031 exchange to swap your one rental property for two. A 1031 exchange allows you to defer capital gains from the sale of real estate as long as you put the proceeds back into other real estate within a certain timeframe. According to IRS rules, you can use capital gains from one property to buy up to three others without incurring a tax obligation.
6. Line Up Financing
No matter how you choose to approach expanding your portfolio, you’ll likely need some form of financing. Get to know a quality lender, and line up your financing as early as possible.
When you have financing in place, it allows you to act quickly. Remember how the properties offering value pop onto the market and then quickly pop off? If you don’t have financing in place, someone else will be able to snag that value before you do.
7. Get Into a Rhythm
Once you find a process that works, get into a rhythm of adding new properties on a regular basis — even yearly, if you can make it work. Here’s a simple process that can work under the right conditions:
- Buy: Find a home that delivers value, most likely an older home that hasn’t been updated in some time.
- Renovate: Execute on affordable renovations that increase the value of the home and the amount of rent you can charge.
- Rent: Find tenants for the home.
- Refinance: After a year, refinance and pull as much equity as possible out of the home.
- Buy Again: Use that equity to buy another home that delivers value, and start all over with renovation, renting, refinancing, etc.
If you can get into a semi-regular rhythm, you’ll look up in a few years to find that you have a significant portfolio of properties that are delivering the cash flow you want.
How HUNTAHOME Can Help
At HUNTAHOME, we’re more than just a provider of property management in Dallas and Fort Worth. We also help clients identify and buy Dallas and Fort Worth homes for sale as they build their portfolios.
Above, we talk about getting to know the market, identifying value and creating processes that ultimately build portfolios and wealth. And we can help you at every step along the way, getting in touch when we see opportunity, helping you evaluate different properties, as well as serving as your broker when buying and selling DFW homes for sale.
Are you ready to start building your portfolio? Get in touch to learn more about how we can help.