How To Build A Real Estate Portfolio

In This Article

All finance gurus share some common advice: “Save 10 percent of your paycheck, put it away in some slow growth stocks or mutual funds, wait 50 years, and you’ll be the richest person… in the cemetery.”

I don’t know about you, but I didn’t want the slow route. I wanted financial freedom. Faster.

That’s why I chose real estate investing!

But building your real estate portfolio can take a long time, too. Buying one house every few years—saving up enough for the down payment each time—means 20 years could pass before you achieve the financial freedom you want.

So, if you want to build a portfolio fast, what should you do? Skip the long-term strategy and think short-term with a powerful strategy called “the stack.”

(I think you’re going to like this.)

How To Build A Real Estate Portfolio: Tips And Hints

Start small

Most investors don’t start out with a huge amount of capital, so don’t worry if you don’t have a lot to invest. Choose your investments based on your current capabilities, even if your long-term goal is to own hundreds of multifamily properties. There’s nothing wrong about starting with a couple of single-family homes in your area. There’s also absolutely nothing wrong about being creative when looking into your financing options. If you don’t have enough to invest, you can look into alternatives like crowdfunded real estate to help you make that first step into property investment. 

Consider exponential rather than linear increases to your portfolio

If there is any one property investment strategy you should consider when starting out it’s exponential growth. Quite simply, exponential growth works by multiplication rather than by addition. The way exponential growth works in real estate is by quickly buying, updating, and refinancing properties in order to buy more properties. You will generate substantial ROIs this way much, much faster than if you buy just one property and then wait to save some more before buying your next one, which can take a very long time. The exponential growth method in real estate is known as the BRRRR method, and we explain it in detail further down in this article.

Learn your local market

This is absolutely crucial for any real estate investor. Housing markets differ wildly across the country: what’s true of West Coast will not be true of the Midwest, for example. Understanding your local real estate market is about much more than just knowing the current house prices in your area. You also need to dive deep into the area’s demographics: is the area popular with families or young professionals? What’s the job market like – what rents can people realistically afford here? When you know the answers to these questions, you’ll be better equipped to choose investment properties that will deliver in your chosen location.  

Take notes

Or, even better, create an Excel spreadsheet (yes, really). List all the key indicators of investment success and record how your investment properties perform across them every year. Essentially, an investor should have a solid record of every property analysis they perform. Include all maintenance expenses, taxes, and other factors that affect your returns. You’ll also need to keep track of your financing sources: the more information you have, the better you will be able to demonstrate to future lenders that you have a successful track record and are low-risk for another loan. 

Don’t lose your numbers: they’re crucial for helping you make better decisions in the future.

Research your financing options

This is important for any real estate investor, but especially for those who may not qualify for a traditional mortgage. Fortunately, even if you can’t take out a conventional mortgage on your investment property (for example, you don’t have enough for a down payment), you likely will still be able to finance your investment another way. A hard money loan or a fix-and-flip loan may be the way forward. This type of loan is offered by specialized lenders (rather than a traditional mortgage lender) and secures the loan against the investment property itself. Fix-and-flip loans are also offered by some real estate crowdfunding platforms, so you should definitely look into that option.

The 1% rule: what you need to know

Want to determine whether your real estate investment will be worth it? Always apply the 1% rule before you do anything else. How does the 1% rule work  in real estate? If the rent on your investment is equal to or less than the total purchase price of the investment, you’re good to go.

Your objective

How fast are your hoping to grow your real estate portfolio? In 15 years? Or 5? You need to know what you’re hoping to achieve when before you even start. Having a clear objective will help you make the right decisions about the type of properties you’ll be investing in. As a basic rule of thumb, if you want fast, short-term returns, you should look into wholesaling. If you’re in it for the long(er) game, then single-family and multifamily homes are your best bet.

Asset allocation

Asset allocation in real estate is all about assessing risk. Are you prepared to invest in riskier real estate options in the hope of faster returns (for example, low-value properties that require a lot of work) or do you want to play it safe? The correct asset allocation should closely align with your objectives as an investor. 

Who will manage your portfolio?

Last but not least, you need to decide whether your real estate portfolio management strategy will consist of you managing your real portfolio yourself or have a management company take care of it for you. Obviously, there will be added costs if you choose to outsource your portfolio management, but if you’re new to investing and suddenly have multiple properties to manage, you may struggle. If you’re starting with just one single-family home, you are unlikely to need a management company. However, as your portfolio grows, it’s something worth considering. 

Why build a real estate investment portfolio?

The fact is: real estate is still one of the best ways of investing your money. Not only is building a real estate portfolio a great way to build wealth in years rather than decades, but it’s also an insurance for your future. Real estate appreciates in value over time (in most cases), so should you sell your portfolio, you’re unlikely to lose money. 

Finally, building a real estate portfolio is one of the best ways to generate passive income – that is, an income that doesn’t require your active labor. Becoming a successful rel estate investor can free up your time to pursue other goals and have more free time. 

The conventional way of building a real estate portfolio

Most beginner real estate investors accumulate rental properties in a very slow, methodical way. First, they buy one house. Then maybe another house… then a few years later, another one. They are growing their portfolio linearly by adding assets gradually.

Nothing wrong with that. It’s just slow.

If you want to achieve faster growth, you’ve got to grow exponentially.

And that’s where the BRRRR method and ‘’the stack’’ come in.

The BRRRR Method of Building a Portfolio

The BRRR method of building a real estate portfolio involves several simple steps toward building wealth faster than the conventional method. These steps are:

Buy: The key to success with the BRRRR method is buying a property below market value in order to then add value. Don’t buy the most expensive home on the market!

Repair: This is the adding value part. The key is to make the property habitable and attractive to potential tenants without spending huge amounts on repairs. You want to get the repairs done as cheaply as possible, but still end up with a property that has a good finish. 

Rent: Now, find a tenant. This is crucial: you want to start renting the property as soon as possible in order to have the loan repayments covered.

Refinance: The next step is to find a good refinancing option (by good, we man one that will get you 75-80% of the value of the home). Often, as a budding investor, you’ll find that local lenders will be more helpful than larger banks. Remember, you’ll be getting the percentage of the new value of your home after the upgrades.

Repeat: You’ve refinanced and got your money on your first property. It’s now time to invest in your second one! Or, if you’re smart about it, how about your second and third one at the same time? 

What sort of a time frame should you be looking at? If you’re well-organized, you could start expanding your portfolio in as little as a year after buying your first investment property. In just 5 years, you could be generating returns from 5-10 rental properties rather than just one the conventional way.

BRRRR Method Vs. Conventional

In a nutshell: the conventional method for investing in a rental property is buying a property, taking out a conventional mortgage, and having tenants pay off the mortgage for you through rental payments. On the other hand, the BRRRR method involves buying a property, upgrading or repairing it, refinancing, and using the cash from the refinancing to buy more investment properties. 

The conventional method of real estate investing is more suitable for you if time is not of the essence and you want to generate some passive income alongside a regular source of income (e.g. full-time employment). On the other hand, the BRRRR method, although more hands-on and effortful, can generate you more income faster. If your goal is financial independence within several years, it’s the way to go.

How “The Stack” Grows Wealth Exponentially

Let’s say you buy one house this year. That’s it. Just one house.

That first transaction requires a lot of work—and the truth is, one deal doesn’t equal freedom. But it does provide knowledge and experience.

Once you’ve got that knowledge and experience (and a little equity to boot!), wait an entire year and buy two units. Maybe a duplex, maybe two single-family houses.

(Wondering where the money came from? I’ll explain that in a moment.)

The next year, can you double down again? After all, you already own three units. What’s another four? You add the experience and knowledge from the last deal, and now you buy a fourplex or maybe a pair of duplexes. The next year, you double again and buy eight units. Then 16… then 32.

Each year, you add experience and knowledge, dialing in your systems. In addition, your new network makes financing your properties simpler.

Pro tip: Ready to invest in rental property? BiggerPockets’ guide to the buy and hold strategy will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here’s how.

So, here we are in year six. You’ve got 63 rental units. If each unit averages $150 in profit after all expenses, that’s almost $10,000 in monthly cash flow. And we haven’t even discussed the appreciation—at an average increase of two percent per year, you’ve gained significant equity. Need quick cash (or just ready to slim down your portfolio in a few years)? No problem. You’ve got plenty of options to sell.

What if you double again?

Stacking even faster in rental real estate

Now, if you wanted to do this faster, maybe you double your purchases each year. You might go from one unit to a fourplex to a 16-unit building to 64 units… and you’ve hit that $10,000 per month in rental income even faster.

The point is: If you grow exponentially, you can grow your portfolio fast. No one gets to hundreds or thousands of units by purchasing one unit at a time. They grow exponentially. And the really fascinating thing is that because you are starting small, you keep your risk small at the beginning. As your knowledge and experience grow, so does your portfolio. You aren’t jumping into a 100-unit for your first deal.

You scaled up smart, you scaled up fast, and you scaled up secure.

Of course, once you’re at the peak of stacking, you’ll need to take a few more things into consideration. Most notably: How will you manage all these units? That’s when it becomes important to consider hiring a property manager. Yes, they will take a small bite from your monthly income, but you’ll gain back an incredible amount of time. Plus, not everyone is cut out for being a full-time landlord. There’s no shame if that’s you—that’s why property managers exist!

Pro tip: You’ll stack even faster with the help of other real estate investors. Join the BiggerPockets Forums to find investors in your area—and other pros that can answer your toughest questions!

The importance of diversification

At this point, you’ve got a lot of money tied up in real estate. We don’t think that’s a bad thing—we think real estate is one of the most promising industries for wealth building. But that doesn’t mean it’s not important to diversify. What does that mean? It means protecting yourself from an economic downturn by investing in different types of real estate.

You may be interested in investing in the stock market, crypto, or other forms of investment. That’s okay. But you don’t have to leave real estate to diversify your portfolio. A real estate investment portfolio can be incredibly diversified by making smart buying choices.

For some, that might be retail, mobile homes, commercial, or even real estate investment trusts (REITs). Or maybe you really love investing in residential—that’s okay! Consider looking at different asset classes. Having a spread of units across Class A, Class B, and Class C neighborhoods helps protect your investments.

How To Finance Your Stack

What about funding?

Well, there are a ton of ways to finance deals, and in fact, I wrote an entire book about it. You can always start with a traditional mortgage for your first investment property—although you’ll quickly find conventional loans a less-than-ideal method. For one, they’re more cumbersome. And second: They’re slower. When you’re growing quickly, hard money and private lenders can help you offer and close quickly. That speed is essential to the stack.

But my favorite strategy, and one that works really well with the stack, is known as BRRRR investing.

It’s where you:

• Buy a fixer upper (with short-term money, like a hard money loan, line of credit, or partner)
• Rehab it by making any essential repairs—and making it look oh so cute!
• Rent it out (to great tenants who are thrilled to have a remodeled home—and pay top dollar!), and then
• Refinance it and leverage all the money you put into it (which gives you your cash back, so you can then…)
• Repeat the process again and again. Each time, you add more and more passive income to your net worth.

Measuring The Success Of A Real Estate Portfolio

Remember how we talked about holding on to your numbers and starting a spreadsheet? You will need these to measure how successful your investments have been up to now. Broadly speaking, you should take into account key performance indicators like your rate of return, you cap rate, your cash flow, the value of the property after all expenses (including repairs and maintenance), and its performance as a rental property, including occupancy rates and rental repayment rates. The more detailed your performance analysis, the better your future investment choices.

Growing Your Real Estate Portfolio

The key to becoming successful as a real estate investor is not losing momentum when building your real estate portfolio. Generating consistent growth, for example, by buying and refinancing new properties every year, will in turn give you more cash to invest in even more properties and give you better leverage when applying for more loans. The more real estate assets you have, the more credibility you have when applying for finance and approaching new prospects for deals.

We’ve also mentioned the importance of diversification: don’t forget that investing in different types of properties will give you protection in case one property sector stops performing in your area.

Finally, be mindful of several common mistakes real estate investors make when trying to grow their portfolio. These are:

• Buying overly expensive or luxurious properties (unless you are located in a luxury real estate hotspot)
• Not doing your housing market research
• Not exploring different financing options 
• Not keeping track of how your investments are performing
• Not diversifying your property investments
• Not understanding how long it takes to build a house

The Pros and Cons of ‘’The Stack’’ Method of Building A Real Estate Portfolio

Now you know more about building a real estate portfolio using ‘’the stack’’ method, you may be wondering if it’s right for you. If it’s such a great, fast method of creating wealth as a real estate investor, why isn’t everyone using it? 

The pros of ‘’the stack’’ are obvious: if done right, this method can give you substantial passive income and, potentially, financial independence, in several years rather than decades, as is the case with conventional real estate investing. 

The cons, however, are that this method won’t be suitable for everyone. Stacking is higher-risk than investing in one property at a time, particularly if you don’t have the opportunity to diversify and are investing in the same property type over and over again. 

Managing multiple properties also requires time and effort. If you don’t hire a management company, you may find that managing your portfolio will become a full-time job – great if that’s what you were aiming for, but not so great if you were hoping to be more hands-off as an investor. 

Finally, ‘’stacking’’ requires good attention to detail and excellent record-keeping if you want to grow your portfolio successfully. You’ll need to get used to some serious researching and number-crunching to continue building your portfolio. 

With all that said, the effort and risks of using ‘’the stack’’ to create your real estate portfolio are worth it. 

The BRRRR method—or “buy, rehab, rent, refinance, repeat”—is our proven, easy-to-follow method to build your portfolio. When you buy a home, fix it up, improve its value, and then refinance, you’re borrowing against the value of the property at its highest. Done correctly, this allows you to recover more of—or sometimes all of—the money you invested in the property. Our guide to the BRRRR method explains each of the steps and outlines how to build wealth through real estate, one property at a time.

Real estate investing is so powerful. But here’s the bottom line: It only works if you work. So, set a goal: How many units will you buy this year? One? Two? Forty?

Then, go out and crush it.

What do you think about the stack? Would you use this to start building your portfolio faster?

Weigh in below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.