How to Build a Real Estate Portfolio for Cash Flow

Building and growing a real estate portfolio over time can fund a wealthy retirement lifestyle. With multiple rental properties each generating positive cash flow, you can fund your retirement without worrying about many of the economic factors that threaten investors in stocks and bonds.

What To Look for in a Real Estate Portfolio

It's never too late to start building a quality real estate portfolio. If you're young, you can start saving a down payment to buy your first rental property and begin growing your real estate portfolio over the years until you retire.

If you're in the five- to 10-year period before retirement—or if you've already retired—you can convert assets in lower-yielding investments into rental real estate and increase your retirement monthly income.

Here are the criteria that you should look for in a great residential rental investment, whether single-family or condominium. It's OK if you can't meet all of them, and sometimes one factor will be more important than another in a particular investment.

Location

Yes, you can say it three times, as real estate is all about location. You wouldn't want to rent a home in the middle of a supermarket parking lot, but one near a green belt or park for children could be just right.

Rentability

Location is a part of this factor. However, if a home is in a great location, but the competition is stiff, it may not be the best investment. When there are many rentals available and owners are offering incentives, it may not be the right time. When there are few rentals available, not only are you better able to keep a property occupied, you can demand higher rents, too.

Expenses

Some areas command high rents because of the area amenities, so taxes are higher as well. If you can offset taxes and other expenses with monthly cash flow left over, then it's a positive.

Appreciation

Though cash flow is the primary consideration, appreciation in value over time is important. There are two ways in which you build equity in a rental property: appreciation in value and paying down the mortgage. Intelligent leveraging of your investments can be used to grow your portfolio using the equity in owned properties.

How To Build Your Real Estate Portfolio

When you're ready to buy your first rental property, make sure you have the required down payment for your price range. Do your research so you can make an informed purchase decision.

Know Your Market Area

Take the time to do a thorough analysis of your market area. You may have a specific neighborhood or area in mind, but you want to broaden your research to have the knowledge you need for comparisons of possible properties.

Learn what properties are selling well in your price range. Do some research at the courthouse for areas where homes are selling for cash. Investors are the normal cash buyers, so you'll know the areas that other investors, who may be very experienced, are buying into.

Learn How To Value Properties

Learn how real estate agents do a comparative market analysis (CMA). The first thing most successful investors will tell you is to buy below market value. This locks in a profit at the closing table. It also makes it easier to generate an acceptable profitable cash flow when mortgage payments are lower.

Analyze Rentals and Competition 

Dig into the local media where rentals are advertised, both print and online (such as on Craigslist). When you're researching a neighborhood, get the average rental amounts for the type of properties you're considering buying. How many are available? Are owners offering incentives such as free months? Know what you can expect for rent.

Nail Down Expenses

Your expenses are the normal ones, such as budgeted repairs, real estate taxes, insurance, and so on. These kinds of expenses will apply to every property in an area. While you can deduct some of these expenses, it's better to reduce them overall. A mistake in estimating expenses is just as bad as getting locked into a below-market rent for a year—you're throwing away profit.

The condition of the actual properties you are considering is a separate thing, although you will want to budget for obvious repairs you know will be needed for an older property.

Locate the Bargains and Negotiate a Deal 

Locating the bargains is crucial to long-term profit. If you're paying retail, you're losing profits for the life of the ownership period. Once you've located a good deal, negotiate with the seller and lock it in.

Keep Adding to Your Real Estate Portfolio

Once you find your niche and hone your skills, just keep doing the same thing over and over, adding to your rental portfolio. As you pay down mortgages, you may want to leverage with equity, but do so very carefully and do not overextend. Many investors went under in the 2007 crash because they were over-leveraged and couldn't maintain rents to keep paying mortgage payments.

You can also look into the 1031 Tax Deferred Exchange to sell profitable properties to fund larger or more properties to grow your real estate portfolio.

Where To Find Good Deals on Rental Properties

There are some key places to look if you want to find a bargain on rental properties.

Foreclosures

Sometimes you'll find a great deal among foreclosures. However, the heyday of massive foreclosures with owners in place, like we saw during the Great Recession, is over.

Many of the foreclosed homes you'll find today will be in poor condition, with some vacant for a year or more. However, this doesn't mean you shouldn't be constantly following foreclosures through sites such as ​RealtyTrac.com. Foreclosures are still happening and you can grab a good one in rentable condition now and then.

Owners in Distress

Monitor media and online sources for owners who are in distress. These are people who for financial reasons must sell their homes in a hurry and in a situation that can result in you buying below current market value. Perhaps they have medical expenses, have been laid off at work, or they need to move for employment in a hurry. Do keyword searches on Craigslist for listings by owners with phrases like "must sell", "taking all offers," etc.

Pre-Foreclosures

Pre-foreclosures present an opportunity for investors to locate properties before foreclosure that they can buy at a discount to full market value. Realtytrac.com and other sites have sections just for these listings.

Wholesalers and Fix-Flip Investors

Real estate wholesalers who are good at what they do can be a great source for rental homes, if they understand their role in selling to rental property investors. These wholesalers know that you want to buy below the current market value and that the properties should be ready to rent. Fix-and-flip investors also sell mostly to rental property buyers, so they know what you want and definitely provide a ready-to-rent property.

Frequently Asked Questions (FAQs)