{"id":100056,"date":"2020-10-26T05:00:33","date_gmt":"2020-10-26T11:00:33","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=100056"},"modified":"2023-08-04T14:12:50","modified_gmt":"2023-08-04T20:12:50","slug":"build-real-estate-portfolio-fast-the-stack","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/build-real-estate-portfolio-fast-the-stack","title":{"rendered":"How To Build A Real Estate Portfolio"},"content":{"rendered":"\n

All finance gurus share some common advice: \u201cSave 10 percent of your paycheck, put it away in some slow growth stocks or mutual funds, wait 50 years, and you\u2019ll be the richest person\u2026 in the cemetery.\u201d<\/span><\/p>\n\n\n\n

I don\u2019t know about you, but I didn\u2019t want the slow route. I wanted financial freedom. <\/span>Faster<\/span><\/i>.<\/span><\/p>\n\n\n\n

That\u2019s why I chose real estate investing!<\/span><\/p>\n\n\n\n

But building your real estate portfolio can take a long time, too. Buying one house every few years\u2014saving up enough for the down payment each time\u2014means 20 years could pass before you achieve the financial freedom you want.<\/span><\/p>\n\n\n\n

So, if you want to build a portfolio fast, what should you do? Skip the long-term strategy and think <\/span>short<\/span><\/i>-term with a powerful strategy called \u201cthe stack.\u201d<\/span><\/p>\n\n\n\n

(I think you\u2019re going to like this.)<\/span><\/p>\n\n\n\n

How To Build A Real Estate Portfolio: Tips And Hints<\/h2>\n\n\n\n

Start small<\/span><\/h3>\n\n\n\n

Most investors don\u2019t start out with a huge amount of capital, so don\u2019t worry if you don\u2019t 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\u2019s nothing wrong about starting with a couple of single-family homes in your area. There\u2019s also absolutely nothing wrong about being creative when looking into your financing options. If you don\u2019t have enough to invest, you can look into alternatives like crowdfunded real estate to help you make that first step into property investment. <\/span><\/p>\n\n\n\n

Consider exponential rather than linear increases to your portfolio<\/span><\/h3>\n\n\n\n

If there is any one property investment strategy you should consider when starting out it\u2019s 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<\/a>, and we explain it in detail further down in this article.<\/span><\/p>\n\n\n\n

Learn your local market<\/span><\/h3>\n\n\n\n

This is absolutely crucial for any real estate investor. Housing markets differ wildly across the country: what\u2019s 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\u2019s demographics: is the area popular with families or young professionals? What\u2019s the job market like – what rents can people realistically afford here? When you know the answers to these questions, you\u2019ll be better equipped to choose investment properties that will deliver in your chosen location.  <\/span><\/p>\n\n\n\n

Take notes<\/span><\/h3>\n\n\n\n

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\u2019ll 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. <\/span><\/p>\n\n\n\n

Don\u2019t lose your numbers: they\u2019re crucial for helping you make better decisions in the future.<\/span><\/p>\n\n\n\n

Research your financing options<\/span><\/h3>\n\n\n\n

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\u2019t take out a conventional mortgage on your investment property (for example, you don\u2019t 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.<\/span><\/p>\n\n\n\n

The 1% rule: what you need to know<\/span><\/h3>\n\n\n\n

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\u2019re good to go.<\/span><\/p>\n\n\n\n

Your objective<\/span><\/h3>\n\n\n\n

How fast are your hoping to grow your real estate portfolio? In 15 years? Or 5? You need to know what you\u2019re 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\u2019ll be investing in. As a basic rule of thumb, if you want fast, short-term returns, you should look into wholesaling. If you\u2019re in it for the long(er) game, then single-family and multifamily homes are your best bet.<\/span><\/p>\n\n\n\n

Asset allocation<\/span><\/h3>\n\n\n\n

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. <\/span><\/p>\n\n\n\n

Who will manage your portfolio?<\/span><\/h3>\n\n\n\n

Last but not least, you need to decide whether your real estate portfolio management strategy<\/a> 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\u2019re new to investing and suddenly have multiple properties to manage, you may struggle. If you\u2019re starting with just one single-family home, you are unlikely to need a management company. However, as your portfolio grows, it\u2019s something worth considering.\u00a0<\/span><\/p>\n\n\n\n

Why build a real estate investment portfolio?<\/span><\/h3>\n\n\n\n

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\u2019s also an insurance for your future. Real estate appreciates in value over time (in most cases), so should you sell your portfolio, you\u2019re unlikely to lose money. <\/span><\/p>\n\n\n\n

Finally, building a real estate portfolio is one of the best ways to generate passive income<\/a> – that is, an income that doesn\u2019t require your active labor. Becoming a successful rel estate investor can free up your time to pursue other goals and have more free time. <\/span><\/p>\n\n\n\n

The conventional way of building a real estate portfolio<\/span><\/h3>\n\n\n\n

Most beginner real estate investors accumulate rental properties in a very slow, methodical way. First, they buy one house. Then maybe another house\u2026 then a few years later, another one. They are growing their portfolio linearly by adding assets gradually.<\/span><\/p>\n\n\n\n

Nothing wrong with that. It\u2019s just<\/span> slow<\/span>.<\/span><\/i><\/p>\n\n\n\n

If you want to achieve faster growth, you\u2019ve got to grow exponentially.<\/span><\/p>\n\n\n\n

And that\u2019s where the BRRRR method and \u2018\u2019the stack\u2019\u2019 come in.<\/span><\/p>\n\n\n\n

The BRRRR Method of Building a Portfolio<\/h2>\n\n\n\n

The BRRR method of building a real estate portfolio involves several simple steps toward building wealth faster than the conventional method. These steps are:<\/span><\/p>\n\n\n\n

Buy<\/b>: The key to success with the BRRRR method is buying a property below market value in order to then add value. Don\u2019t buy the most expensive home on the market!<\/span><\/p>\n\n\n\n

Repair<\/b>: 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. <\/span><\/p>\n\n\n\n

Rent<\/b>: 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.<\/span><\/p>\n\n\n\n

Refinance<\/b>: 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\u2019ll find that local lenders will be more helpful than larger banks. Remember, you\u2019ll be getting the percentage of the new value of your home after the upgrades.<\/span><\/p>\n\n\n\n

Repeat<\/b>: You\u2019ve refinanced and got your money on your first property. It\u2019s now time to invest in your second one! Or, if you\u2019re smart about it, how about your second and third one at the same time? <\/span><\/p>\n\n\n\n

What sort of a time frame should you be looking at? If you\u2019re 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.<\/span><\/p>\n\n\n\n

BRRRR Method Vs. Conventional<\/h2>\n\n\n\n

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. <\/span><\/p>\n\n\n\n

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\u2019s the way to go.<\/span><\/p>\n\n\n\n

How \u201cThe Stack\u201d Grows Wealth Exponentially<\/h2>\n\n\n\n

Let\u2019s say you buy one house this year. That\u2019s it. Just one house.<\/p>\n\n\n\n

That first transaction requires a lot of work\u2014and the truth is, one deal doesn’t equal freedom. But it does provide knowledge and experience.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

(Wondering where the money came from? I\u2019ll explain that in a moment.)<\/p>\n\n\n\n

The next year, can you double down again? After all, you already own three units. What\u2019s 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.<\/p>\n\n\n\n

Each year, you add experience and knowledge, dialing in your systems. In addition, your new network makes financing your properties simpler.<\/p>\n\n\n\n

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Pro tip: <\/strong>Ready to invest in rental property? BiggerPockets\u2019 guide to the buy and hold strategy<\/a> 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\u2019s how.<\/em><\/p>\n<\/blockquote>\n\n\n\n

So, here we are in year six. You\u2019ve got 63 rental units. If each unit averages $150 in profit after all expenses, that\u2019s almost $10,000 in monthly cash flow.<\/em> And we haven’t even discussed the appreciation\u2014at 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.<\/p>\n\n\n\n

What if you double again?<\/p>\n\n\n\n

Stacking even faster in rental real estate<\/h3>\n\n\n\n

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\u2019ve hit that $10,000 per month <\/em>in rental income even faster.<\/em><\/p>\n\n\n\n

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\u2019t jumping into a 100-unit for your first deal.<\/p>\n\n\n\n

You scaled up smart, you scaled up fast, and you scaled up secure.<\/p>\n\n\n\n

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\u2014that’s why property managers exist!<\/p>\n\n\n\n

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Pro tip: <\/strong>You’ll stack even faster with the help of other real estate investors. Join the BiggerPockets Forums<\/a> to find investors in your area\u2014and other pros that can answer your toughest questions!<\/p>\n<\/blockquote>\n\n\n\n

The importance of diversification<\/h3>\n\n\n\n

At this point, you’ve got a lot of money tied up in real estate. We don’t think that’s a bad thing\u2014we 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<\/em> of real estate.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

For some, that might be retail, mobile homes, commercial, or even real estate investment trusts (REITs). Or maybe you really love investing in residential\u2014that’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.<\/p>\n\n\n\n

How To Finance Your Stack<\/h2>\n\n\n\n

What about funding?<\/p>\n\n\n\n

Well, there are a ton of ways to finance deals, and in fact, I wrote an entire book about it<\/a>. You can always start with a traditional mortgage for your first investment property\u2014although 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.<\/p>\n\n\n\n

But my favorite strategy, and one that works really well with the stack, is known as BRRRR investing.<\/p>\n\n\n\n

It\u2019s where you:<\/p>\n\n\n\n