The Type Of Property That Every Investor Should Be Adding To Their Portfolio
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Another week brings yet another blog and today I will share with you my opinion of the type of property that you should be adding to your portfolio. Before we get into this weeks blog tho I want to answer a question that I have been asked quite often, especially since I started live broadcasting on Periscope
(Follow me on Periscope if you already haven’t for your daily source of motivation and anything and everything Real Estate).
That question is “How Do I find My Purpose In Life?”
As many of you know I am a big believer in committing to the numbers EVERY single day. Finding your purpose in life consists of doing this exact thing. Committing to the numbers by talking to as many people on a daily basis. Speak to those who already are where you want to me. Ask them questions about how they started, their biggest success, their biggest failure, what pushes them every day to do bigger and better, for whom they do what they do every single day, etc…
Most of these folks will have many stories to share and I genuinely believe that once you hear their journey and experiences, it will firstly mold you into a better individual and secondly allow you to find yourself in one of their stories. Finding yourself will also enable you to find your passion and purpose in life.
How Do You Know What Property to Add to Your Portfolio?
So you are looking to build a portfolio of rental residential units, and you are excited to get started. You have heard all the good things about investing in this market, and all the money you see your colleagues and friends making from real estate.
So, you now only have one question remaining: How do you know what property do you add to your portfolio?
We always have two main items that guide us in our decisions for portfolios for our company and our investors. This is consideration of cash flow, and how quickly this property will help us reach our end goals while minimizing the risk as much as possible.
Cash flow should always be on your mind for your portfolio. The risk of appreciation in this market, and hope that a property will go up in value is not a sustainable strategy. Investing for cash flow is what you need to focus upon for success in the interim and for reaching your long term end goal.
If Cash is King, then Cash Flow must be Queen.
Cash flow allows you to replace or increase your family’s income, which allows you to build wealth. At the same time, the property holds or gains a value over time (general appreciation, as well as appreciation from increases in rental rates over time), which also helps you build wealth. If in the future you wish to make changes to your portfolio or cash out of your real estate holdings, this method of investment will give you options. And it is with options that you can track your progress to your end goal. In order to have such options you must purchase in an area with good infrastructure and a level of desirability for both tenants and home owners.
The only aspect of cash flow which matters is your net income potential. Rents could be $50,000 per year, but if your expenses are $48,000 per year, does $2,000 in cashflow move you quick enough to your end goal? Net income is total rental potential minus a vacancy/maintenance loss consideration, and then minus all your operational expenses such as insurance, taxes, and any management fees.
Talking to local experts in the area, or partnering with a reputable turnkey investment company can help you understand what you might expect for expenses and if the cash flow from the investment will help you reach your end goal. We help our investors by being upfront with known facts of the property, rental rates for the area, and have a handle on all of the operational expenses of our properties. All in hopes of guiding our investors towards their end goal.
Focus On Your End Goal
And now that I have said end goal enough times to make you softly sing those words to yourself subconsciously, what is it that we mean by end goal? For each investor, this can be a range of differing things. It could be passive income which exceeds monthly family budget. It could be a fixed amount of annual passive income, like $100,000. Or it could be number of units in your portfolio.
Generally, the end goal is a bigger discussion among you and your family, business partners, or other stakeholders as a part of your investments. It is important to have others as advisors included in your planning.
Whatever you come up with for your end goal, the question should never be is the property pretty enough, how much could it appreciate or do you like the neighborhood, but rather do the financials/numbers in the deal make sense, and do they help you reach your end goal? We help investors around the world get closer to their end goal. We don’t simply source investments and manage great properties, we act in an advisory role when we engage investors in our market. We help them understand the cash flows of our offerings, and provide enough information for a sound decision to be made.
So, when looking to invest in real estate, make sure to surround yourself with key people that will always have your best interest at heart and have an established end goal in mind. Purchase properties that offer the lowest risk possible and that have great exit strategies. Make sure that every property you buy gets you a step closer of achieving your end goal.
I will leave you with a parting quote:
It’s impossible, ” said pride. “It’s risky,” said experience. “It’s pointless,” says reason. “Give it a try,” whispered the heart.