How do you realistically increase the number of rental properties you hold and thus grow your real estate investment portfolio? Maybe you start with the BRRRR method or you simply start upscaling from single family to commercial real estate. No matter the method you choose, one thing is important: It’s essential to grow.
Scaling your income property portfolio is crucial for ensuring continuity in cash flow, achieving financial freedom, accommodating increasing expenses, and achieving your larger life goals.
How many rental homes do I need?
If you’ve owned a few rental properties—or even if not, but have just done your homework—you already know that you need diversification in your portfolio to make sure rental income keeps coming in. This will probably include diversification in both number of units and geography. Then, if something hampers the performance of a couple of your rentals, you should still be ahead of the game.
It is also important to recognize that typically expenses will continuously rise due to inflation. For example, taxes, food, travel, healthcare, and your own housing costs will probably keep growing for the rest of your life. Then, make sure that you account for the fact that once you achieve your goals and dream lifestyle, you will no doubt be setting even higher goals to achieve.
How many rentals you need really is an individual equation that absolutely depends on where you want to be financially. Maybe you only need 10 to reach your financial freedom number. For others, it may be 100, or 1,000, or even 10,000 units.
Remember that over a few decades, the chances are that you will cycle through a few properties. Aging ones may need to be replaced. And some may be switched out for more profitable options in new markets. This means ongoing transactional activity in addition to management.
Learn to quickly scan the market to see what’s available, and when you see something that fits what you’re looking for, jump on it. Similarly, you must be prepared to cut your losses when necessary. If one of your investment properties isn’t giving you positive cash flow and equity growth, it may be time to seriously consider selling. In general, long-term renters are the ones that will help you reach your real estate investing goals.
Why grow and diversify your real estate portfolio?
There are several ways you can benefit from growing and diversifying your portfolio, including tax breaks, appreciation, and sharp increases on returns. There are a few methods to consider here.
A tool called leverage can be applied to a portfolio to gain capital. Essentially, leverage uses borrowed money to increase your return. Leverage changes the market risk to which your portfolio is exposed. Utilize this tool by borrowing from a broker or bank before investing in a property.
But be aware that leveraging properties can also work against you. In markets where prices drop significantly, investors can see sharply reduced profits.
Diversification is another technique that is important to the continuation of profits while investing in real estate. You can diversify your portfolio by investing in different asset types—single-family homes, multifamily properties, apartment complexes—and properties that vary by neighborhood and geographic location. This will help you build passive income and cover your bases in case a recession comes.
Tax benefits of scaling a rental property portfolio
Growing your real estate investment portfolio is essential for building wealth because it creates multiple avenues that generate money.
Not only does a large portfolio earn you more money, but it also allows you to deduct more on your taxes. Common deductions include:
- Mortgage expenses
You will also be able to leverage more to invest in additional properties and continue growing wealth. And, with diversification, you can reduce the risk of losing that wealth in case of economic hardship.
More on scaling your real estate business
The challenges of scaling a rental property portfolio
Profitably and soundly scaling a rental portfolio takes work. This includes rehabbing, finding property deals, navigating the distance between properties, and maintaining a good level of service and free time during the process. You want to actually be able to enjoy the rewards of investing in real estate. If you are not careful, you’ll create more than a full-time job for yourself—a job where you may work late nights, weekends, and holidays.
Try to go too fast, and you will burn out. Take shortcuts, and it won’t be sustainable. If you aren’t efficient at every step in the process, you will suffer subpar yields, miss your goal deadlines, or simply won’t close on enough properties.
The truth is that you can scale very quickly. The key is doing it sustainably so that you can afford to hang onto your gains and cash flow lifelines. This means having a good framework, proficient team members so everything does not rely on you at all times, and a sound mix of your own cash and financial leverage from others.
Fortunately, there are now much more efficient ways to scale rentals; this is especially true for busy professionals who know they need the passive income and yields that rentals offer but either can’t skip the paychecks in the short term or don’t want to leave the careers that they care about. New technology, better access to data, and more efficient cloud-based systems have attracted more sophisticated investors to turnkey rentals and real estate crowdfunding.
Delegation doesn’t necessarily have to be via an employee. One way to delegate is simply to hire a virtual assistant through sites such as Upwork. You can use many third parties for delegation as well (property management companies being an example). But obviously, hiring people is a huge part of delegation.
While growing and diversifying your real estate investment portfolio, the day-to-day work can become demanding. To lessen your load as a landlord, you can hire a professional—like a property manager—to deal with tenants and their needs. Property managers can handle maintenance and repairs, collection of rent, hiring contractors, and the like.
As your business grows, you will want to offload the less important tasks or those you aren’t particularly good at (or particularly dislike) to others. But there is such a thing as hiring too soon when you can’t afford it or hiring someone for a position that is too vague or messy to be useful. There are two ways to figure out what exactly you should and should not be doing.
- Keep a running tab of everything you do for a week or two. Break it down by the hour or half-hour and keep track of it as you go about your day. Then at the end of the week, look back and evaluate which tasks were essential and needed to be done by you (at least for now) and which can be offloaded.
- Brainstorm. Make a list of everything you do in your business. Which items are the most important? Which are you good at? What could you offload to a subordinate? What do you need to offload because you’re no good at it? Once you’ve come up with a list, break each thing out into these various categories.
Remember the Pareto Principle—80% of your results come from 20% of your activities. You want to focus on that 20 percent. If you can afford it, leave the 80 percent to someone else.
This process should help clarify what you should and should not be delegating.
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Measuring and KPIs
Sometimes it’s easy to figure out when an employee or third party is doing well or doing terribly. Other times, it is not. The more direct measures you can come up with to measure performance, the better.
It’s also a good idea to work on these with the person you’ll be measuring, be they an employee or third party. You want to get them on board with the evaluation method. Otherwise, they might feel it’s arbitrary or unfair. The more that person buys into the measurements, the more they will work to achieve those goals.
Furthermore, it’s important to note that you might develop unrealistic goals and numbers to hit. Still, even if they are off, coming up with numbers to aim for allows you to measure similar employees against each other and measure for improvement. If you measure, you can tell if someone is doing better or worse than before. The more you know, and the quicker you know it, the better.
Here are some examples of KPIs (key performance indicators) for various jobs that many real estate investors often hire:
- Leasing agent: application per showing, leases per showing
- Maintenance technician: call back percentage, complaints
- Turnover coordinator (often the property manager): average time to turn a property over and get back on market, complaints from new move-ins
- Rehab coordinator: budget vs. actual cost (remember, it may be your budget that is the problem and not the construction cost)
- Marketer: calls per letter sent out, deals per letter sent out
Really, there are a lot of these. But as with everything in business, the key is to measure. And concerning employees or key third-party vendors, the more you talk with them about these measurements and create plans for improvement, the more effective this process will be.
While any small business will have a lot of overlap between departments (if you can even call them departments in a small business), you want to start to delineate your staff’s roles sooner rather than later. KPIs are not going to work very well if someone is split between four different primary tasks. Indeed, some tasks, such as accounting, are hard to create KPIs for. If you have someone in charge primarily of bookkeeping but who also oversees turnover and you have a KPI for the latter but not the former, that might corrupt what your employee believes is the most important thing to focus on.
You want each position delineated as well as possible with its own goals so an employee or even a vendor can focus on achieving those goals instead of just checking off boxes and trying to make sure everything is complete. You want to create sandboxes, and you want your staff to stay in their particular sandbox (for the most part, at least).
And again, this isn’t always possible in a small business.
Working on your business
Here’s the bottom line: The bigger you grow, the more you need to focus on working on your business rather than in your business. The more important tasks will be the ones that aren’t as straightforward. Things like networking, brainstorming new ideas for growth, strategizing, hiring, and firing should take precedent. And as far as the work in your business that you do need to do, you should focus on the highest level activities, which will often be finding good deals.
As the great John Wooden once said, “Never mistake activity for achievement.”
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.