BiggerPockets

Real Estate As An Asset Class

Building a Leveraged Real Estate Portfolio

Investing in the single family real estate has proven to have similar trends, characteristics, return analysis and subtle nuances as the more traditional asset classes like stocks or mutual funds. When talking to prospective investors about real estate opportunities, we have found that, in order to stabilize an investment portfolio, there are four categories to be positioned in for a properly leveraged real estate portfolio: cash flow, equity, anchor and quality plays.

This portfolio is based on a targeted price range within a market that we have referred to as the "Sweet Spot" . This segment of the market is where an investor will find the strongest and most predictable returning assets due to the associated quality of tenants, properties and locations.

Cash Flow Play :

Found in the lower price points of the "Sweet Spot", these properties will most often be the strongest cash flow opportunities for a portfolio since they will have the highest rent ratios for the price points. The higher returns on this property will help leverage for the additional strategies that could be used in higher price points, which will likely have lower cash on cash returns.

Equity Play:

These opportunities and neighborhoods have the strongest future growth and appreciation potential. Given the higher quality characteristics of the property, and the strength of that segment of the market, these properties will represent a hedge towards a market's upside potential. Since there is a diminishing relationship of rents to home pricing, these opportunities may contribute less to a portfolio's monthly cash flow percentages but compensate for those returns with the strong equity potential.

Anchor Play:

These properties are often a great entry point for the start of an investment portfolio. Typically newer vintage, well-constructed, median priced properties, these assets are positioned in more stable neighborhoods and allow for solid cash on cash returns and, when needed, an ease of liquidity. This type of property will help be an anchor to the portfolio's risk profile, as they most closely represent "bread and butter" property.

Quality Play:

This strategy is based primarily on location, and are only found in a few sub-markets with very unique fundamentals. Properties in these neighborhoods are often older vintage and are surrounded by high quality, well-established neighborhoods. These locations will have the strongest tenant demographics, best school districts and solid historical market stability.

Entry Points and Portfolio Components

The combination of each of these four strategies will allow an investor to capitalize on the benefits of each segment of the market while leveraging the portfolio's risks associated with vacancy, maintenance, market fluctuations and liquidity. These defined strategies can help first time investors decide the most comfortable entry point based on their investment goals and also guide seasoned investors to continue developing a well balanced portfolio.

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