Property Expert Nick Statman on Building A Property Portfolio.
In the investment world, everyone talks about their portfolio. A property portfolio is a breakdown of all of your property investments. It is a way to describe how many property investments you have and what kind of investments they are. Your portfolio serves as a reflection on your investment history, your finances, and your buying, selling, and management strategies.
One of the main reasons investors work to build a portfolio is because it helps them maximize their ROI. A diverse portfolio minimizes risk and allows you to generate income from multiple sources and reduces volatility. .
So how do you get started? How do you move from one investment to a vibrant and diversified portfolio that generates return?
The snowball method
The snowball method can be used any time you’re trying to tackle a big project in small, consecutive steps. Some people use the snowball method to get out of debt. They pay off a small debt and use that money to work on paying off their next smallest debt. This is a helpful strategy when building a property portfolio as well.
If your first investment property brings in £700 a month, you will generate £8,400 annually. If you want to buy a second property that requires a £25,000 down payment, it will take you roughly four years to cash flow the deposit.
If that second property also brings in £700, you’ll now be making £16,800 annually and will only take you two years to cash flow the deposit for your third property.
As you continue this pattern, you will be able to afford to buy more properties in a shorter amount of time. This method prevents you from falling deep into debt, but requires patience and self-discipline.
The BRRRR method
BRRRR stands for Buy, Refurb, Rent, Refinance, and Repeat. This strategy involves buying low-cost properties that need renovations. Once you renovate it and rent it out, you use the rental income to pay down the mortgage, earn a profit and build equity in the home. Then, you refinance the property to get access to capital and use that to buy your next property. As you repeat this pattern, you can begin to purchase multiple properties (or a different kind of property, like multi-family apartments or retail space) and diversify your portfolio as you build it.
How To Diversify As You Build
Once you have a few residential properties in your growing portfolio and you feel confident in your strategy, it will be time to change things up a bit. This means diversifying so you can reduce risk and increase your ROI. Some of the most common ways to diversify your portfolio include:
- Investing in different locations. The beautiful thing about investing in property is that you are not limited to the location in which you live. If your first few investments are in the same city, branch out to surrounding areas that are known for having a profitable housing market.
- Investing in different asset classes. Diversification means slowly expanding the types of properties you invest in. Many investors start with single family homes and then invest in different asset classes, like multi-family apartments.
- Investing in REITS. A REIT is a real estate investment trust that allows investors to pool money with others and work together to collectively purchase large investments (like shopping malls or warehouses) that they may not have been able to afford on their own. They split the cost of the investment and split the profits.
Some investors spend their entire careers slowly building and diversifying their portfolios. Others work quickly to accumulate properties and develop an impressive property portfolio. Whatever your strategy; understanding the property market, building a solid team, and focusing on slow but steady diversification will help you reach next level success.
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