Real Estate Investing Basics: How to Start Building Your Portfolio
There’s money to be made in real estate — and many of our country’s most successful leaders and influencers are the proof.
If you’re hoping to join their ranks, then you’re not alone. As billionaire Andrew Carnegie once put it, “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”
But a profit-earning real estate portfolio isn’t made in a day. It takes a combination of smart strategy, hard work, and diligence to build up that ROI — as well as that wealth you’re looking for.
Ready to get started? Here’s how:
Choose the right market.
There is no “national” housing market. Real estate is highly local, and conditions vary greatly from place to place. In some spots, buyers rule the roost, while in others, sellers have the upper hand — meaning higher prices and less room for profit for you.
Before making your first investment, be sure to analyze the markets you’re considering. Where is there a demand for your services (rentals, rehabbed homes, etc.)? Where can you get a good deal? Where will demand be sustainable and long-term? Remember: you don’t always have to buy in your own backyard. In fact, if the market isn’t right, you shouldn’t.
Know what makes a great investment property.
There are lots of factors that make a strong investment property. A great location (think near local amenities or employment centers), the desirability and appeal of the place, and the expenses it will bring in should all play a role. Make sure you consider both the up-front cost of the property as well as the long-term ones. Things like maintenance, repairs, lawn care, etc. will all cost you — particularly on older homes.
Learn how to spot (and negotiate) a deal.
Buying below retail value is critical if you want to ensure a solid ROI, so be on the lookout for potential deals. Homes that have been on the market a while, are vacant, or are being sold by the owner likely have some wiggle room on price. You can also get a good deal on foreclosures or at auctions — just be sure to factor in any repairs that might be needed.
When you’re ready to purchase your first property, come armed with the info you need to strike a deal. Do a comparative market analysis and know what other properties in the area are selling for. Factor in the costs to repair and rehab the place, as well as market it and rent or sell it later on.
Have good resources.
Wholesalers, fix-and-flip investors, and real estate agents can all be great sources. Not only can they alert you of potential properties that hit (or are about to hit) the market, but they also might have the inside scoop on property history and market data that can fuel your offer. You can also use tools like RealtyTrac to watch for pre-foreclosures in your area.
Be sure of your numbers before closing.
Pay close attention to your lender’s appraisal, and make sure your offer is in line with it. If the property appraises for lower than you’re bidding, you might want to reconsider the deal, as it means the home isn’t worth as much as you expected. You should also call in a home inspector to gauge the condition of the property. Are there any hidden repairs it needs or big issues at work? You can even get a handyman’s estimate of each repair so you can accurately predict costs.
Have a plan for the property.
Make sure you have a clear-cut plan in place for the property before going too far. What needs to be repaired, and how will you make that happen? What’s the timeline, and who will manage the project? If you’re renting it out, how will you find renters, collect monthly rents, and keep on top of maintenance? Have a detailed plan of attack down and ready.
Let one investment fuel the next.
Once you have equity in your first property, you can tap it to cover the down payment costs of your next investment, and so on and so forth. You can also use your income from your first property to cover future investments, allowing you to build momentum and expand your portfolio over time. Eventually, you might even consider a blanket loan or other product to cover all of your properties and streamline it into one, single mortgage payment.