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How to build your real estate investment portfolio

March 13th, 2017
Investing in real estate with the aim of acquiring set financial goals for the future is deemed as a preferred long-term capital building strategy. In today's world there is an abundance of opportunities available when getting started on your real estate portfolio. Whether it is your intent to become a real estate magnate, to secure financial freedom in your retirement years, or just to create an additional revenue stream, there are certain aspects of real estate portfolio management that you should be aware of.

In preparation for embarking on your successful real estate investment endeavor, it is recommended to cover these important aspects which relate directly to portfolio building.

Know the risks involved

Real estate has outperformed the stock market on a regular basis and has provided investors with protection from inflation as rental rates have been raised accordingly. Since the housing bubble burst of 2008, the real estate markets across the US have made a transition to a state of expansion from a state of recovery. In the majority of markets, the pricing levels have exceeded pre financial crisis highs. The future indeed seems bright with real funding and market forces propelling the price rise, however it is not possible to predict a future lull or bubble burst. It is imperative to keep your finger on the pulse on the macro level and to be aware of specific signs and their correlation, which may include slowdowns in housing price appreciation, declines in occupancy, the raising of interest rates and a large number of properties on the market without buyers.

On a deal to deal basis, it is critical that due diligence is conducted in depth and in the most rigorous and professional manner. The underlying risks associated with the transaction need to be identified ahead of time, prior to considering whether the investment is lucrative and on the safe side.

It is also of the highest importance that you have a healthy cash flow buffer to ensure your financial security, as deals may go sour from time to time. Investing your own capital to acquire an asset that will bring you a safe and constant rate of return should not be on the cards if the worst case scenario is something that will break the bank.

Treat your portfolio as a business

Good planning, the outlining of finances, knowledge acquisition, as well as staying focused on your business running and financial goals are crucial to your real estate portfolio's success. A professional business mindset is part and parcel of reaching projected profits. Utilize the experience of proven investors to ascertain what the best deals are. Each real estate project should undergo dedicated analysis and a concrete due diligence process.

Investment success requires a full understanding of the subject of real estate investment, and this is an ongoing process which never ends as there are continuous changes in trends. Do your homework and turn reading professional articles into a habit. Furthermore, assessing deals requires local market expertise in order to understand which areas are the prime locations for property investments.

The aspect of property management is also critical to your business plan's success. Evaluate whether your expertise is substantial to take on the management aspects of the property. It is recommended to take on a professional property management company to handle the maintenance, screening of tenants, legalities and leases. The additional costs of taking on such a company will most probably save you a lot of money in the long run.

Keep a close tab on each asset's performance. The earlier you pick up on a poorly performing investment, the higher your chances are to make a good judgement call in a timely manner to make adjustments to your overall portfolio performance.

Diversification is Key

A key concept in real estate investments is portfolio diversification. The strategic allocation of capital across a variety of assets in different asset classes will lower overexposure and risk in general. Residential single homes, multifamily projects, retail properties, hospitality and warehousing, are just examples of the various asset classes available for property investments. Lucrative investments will aim to create a stable income stream from the rents which will affect your overall ROI. In unison, there is room to hedge across the different business models pertaining to each deal and its exit timeline.

In terms of the geographic location of your investments, work to diversify across various neighborhoods and cities in primary and gateway markets. This type of hedging will protect you from local economic slowdowns which may occur in different regions.

Start Small

Protect your money by initially starting up your investment portfolio on a small scale which is more manageable on an execution level and easier to optimize. Making the mistake to jump in too big too quickly will possibly hinder your chances of reaching your long term goals, as early mistakes will have a far heavier price.

For a relatively low commitment, investors can now enter the private real estate market via social network investment platforms. Such platforms facilitate the utilization of experienced investors' knowledge, enabling new investors to tag along with partial equity in multiple real estate projects which have undergone professional due diligence processes. This could be the best way forward to starting your journey to building a fully-fledged investment portfolio.

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