Starting Small: How To Build Your Rental Portfolio

By Chalmers Brown, CTO of Due

When it comes to retirement, most people immediately think of 401(k) and pension plans. It’s kind of a no-brainer if your employer offers a matching contribution or provides a pension. But for those who are self employed, not offered retirement, or want to supplement, other options might be appealing. In many ways a more stable option, many find real estate investing preferable to stocks and bonds.

Real estate might be the sort of wealth building activity you imagine is only available to the wealthy or those with construction experience. In the real estate game, it admittedly doesn’t hurt to have a huge trust fund or the skills to renovate a house. By no means is it a requirement, however.

Thankfully for the majority of the population, acquiring real estate for retirement can be accomplished even on modest incomes. It might take a lot more effort and planning compared to those who go into it with pre-acquired wealth, but it’s doable. Here are three things to keep in mind when starting and building out your real estate portfolio. 

1. Secure a Starter Home

There’s some debate as to whether your first home should be a basic “starter” home or one you can live in long term. One argument for the longer-term option is that living in a starter home for a few years then selling can be a hassle. Also, there are the hidden expenses with the sales process such as closing costs.

For those who want to start acquiring real estate for rentals, that isn’t as much of an issue. You still get the benefit of building equity while you’re living there. When you’re ready to upgrade to a larger or pricier home, you can rent out the starter. In an ideal world, the rental income will be enough to cover your starter’s mortgage payment. Renting out your starter home is a great way to dip your toes into the rental game. 

As an added bonus, you are able to deduct certain expenses from the home for business purposes. Ever since standard deductions were raised in 2018, fewer people itemize their tax returns. This means that most people do not get to deduct things like mortgage interest. If you’re renting out a home with a mortgage, corresponding interest is a business expense and therefore deductible.

2. Keep An Eye Out For Deals 

This might seem like common sense, but keeping an eye on the market and timing your investments can really pay off. Snapping up foreclosures in a poor market can yield some favorable results. Knowing the market and where it might be headed can guide you toward more valuable properties. Make sure you have some good real estate and mortgage news sources you can refer to on a regular basis.

Alternatively, you can look for short-term deals with contract flipping, contract assignments, and flipping real estate contracts. For example, if you read up on wholesale real estate it’s a growing area where you can find short-term deals to generate cash. Short-term investing strategies can set you up well for a long-term plan if done correctly. 

But above all, try to keep the ability to move quickly if an opportunity arises. If you want to try to snag foreclosures or try wholesale real estate make sure you’re familiar with the process. If you know you’re going to need a loan for an upcoming purchase, get your financing set up ahead of time. You’re most likely not the only person looking to add to their real estate portfolio, and sometimes speed determines who snags a deal.

3. Create a Long-Term Plan

If real estate is a major component of your long-term retirement plan, you need to get a solid plan in place. Some factors to consider are what age you want to retire and what standard of living you want to maintain. You can also decide how much involvement you want to retain throughout the years.

Once you determine when you want to retire and how much income you think you’ll need every month, set milestones. These might include the number of properties you hope to acquire every so many years or payoff dates for real estate loans. Check in on your progress every year or two to make sure you’re on track to accomplish your goals.

In your planning, you should also make sure to set diversification goals. You can limit the fallout from housing market fluctuations by purchasing properties at different price points. When you’re first starting out, you’re obviously more likely to pick up lower priced properties. After you build momentum, consider cutting back on quantity and focus on fewer properties in higher marker tiers. You can also diversify between single family homes, multi-family homes, apartments, land, and office space.

To protect yourself even further, you can purchase properties in varying geographical areas. That way, you can avoid seeing your investments plummet in value if an entire city’s economic stability is disrupted. 

While it might seem unlikely that an entire area could see real estate value crash, it isn’t without precedence. In 1960, the Detroit auto industry was booming. Who would have thought that the entire city would be declaring bankruptcy mere decades later? With remote work options and businesses leaving for more tax-friendly areas, Silicon Valley might see a housing bubble in the near future. Property diversification can protect your real estate portfolio value from being wiped out from a single, localized economic downturn.

Wealth Not Required

A big pile of money is always pretty helpful if you’re getting into investing. With real estate, it might seem especially unlikely that you’ll be able to build a portfolio on a small income. However by making smart decisions and timing your actions appropriately, you can have a steady source of passive income for retirement.

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