If you’re interested in building wealth or preparing for retirement, one of your best strategies is to snowball a property investment portfolio. If you’re new to the world of real estate investing, it may be an intimidating idea, but with some time, experience, and thoughtful decision making, you can turn a relatively small initial investment into something lucrative.
The idea behind “snowballing” your property investments is easy to understand, even if you’re not familiar with real estate investing. You’ll start with a single rental property, collecting rent above your monthly expenses.
Even if it’s only a few hundred dollars each month, within a couple of years, you’ll be able to save up enough money to fund the down payment of a new property.
With two properties, you’ll save twice as much money, allowing you to purchase a third property after a single year. You can repeat this pattern indefinitely, eventually purchasing multiple new properties each year and adding to your ability to generate income.
At larger scales, you can purchase entire apartment buildings, and potentially generate millions of dollars of revenue each year.
Why Real Estate?
Why is real estate so valuable for this type of strategy?
- Property management. For starters, you have the ability to enlist the help of a property management company. According to Green Residential, with a property management company, you’ll pay a fixed percentage of your gross monthly rent in exchange for a multitude of services that essentially make your property management hands-free. They’ll take care of marketing, tenant screening, repairs, maintenance, and more, allowing you to pursue other work full-time.
- Market resilience. The real estate market is generally reliable, and not subject to as much volatility as the stock market. This makes it ideal as a long-term strategy for consistent wealth generation.
- Snowballing income. Because of the way rental properties work, it’s easy to generate snowballing income growth. Each property you own will add to your total income while simultaneously appreciating. Additionally, you can tap into loans to increase your buying power, allowing you to take advantage of financial leverage.
Your First Property
According to Roofstock, everything starts with your first property. The better this investment is, the better your running start will be.
- Single family. It’s possible to start with a multi-family property, but a single family property will be less expensive and, in many ways, easier to manage. You want your first property to be a slam-dunk with minimal risk. You only have to worry about one tenant (or one family), and there are fewer variables that can go wrong. Plus, single family homes are often less expensive.
- Good neighborhood. The quality of the neighborhood will dictate the quality of tenants, the potential appreciation of the property, and more. Make sure you start investing in a neighborhood with good schools, low crime rates, plenty of job opportunities, and room to grow in the future. Neighborhoods that are on an upward trajectory will give you the greatest yields in terms of long-term appreciation.
- Good price. You may find a perfect property – in good condition, in a good neighborhood, and attractive to tenants – but you still need to make sure you can get it for a good price. Be willing to negotiate hard and consider alternative options to get a better deal. Even the best property in the best neighborhood can be unprofitable if you spend too much money to acquire it.
- Reliable tenants. It’s tempting to get your property occupied as quickly as possible, but it’s better to take your time and screen your tenants effectively. You’ll collect more consistent rent payments and see higher tenant retention – both of which can lead you to your next property faster. While you’re at it, invest proactively in tenant retention. Communicate openly with your tenants and remain transparent whenever possible. Also, reward your tenants for their loyalty – especially if they always pay rent on time and in full, making your life easier.
Fleshing Out Your Portfolio
After several months of consistent income generation, you’ll be ready to add more properties to your investment portfolio. Consider purchasing multiple properties in the same area, so you can become more familiar with the territory (and more in control of it). Be careful not to over-leverage yourself and retain a sizable emergency fund to take care of any unplanned expenses that arise.
In the early days of your strategy, it’s important to take your time when adding new properties to your portfolio; the fewer properties you have, the more important each one is to your overall performance. Don’t rush to buy the first reasonable home that comes onto the market. Instead, review your options carefully and pick something with a high likelihood of turning a profit. Like with your first property, you’ll need to get a good price and find reliable tenants who can help you build reliable cash flow.
Expanding and Diversifying Your Portfolio
Over time, you’ll want to expand your portfolio and diversify it. A diversified portfolio will be better protected against volatility – and more consistent when it comes to revenue generation.
These are just some of the ways you can diversify a property portfolio:
- Single family and multi-family properties. Single family and multi-family homes each have advantages and disadvantages. For example, single family homes are easier to manage, while multi-family homes are less prone to vacancy issues. Try to get some of each.
- Multiple locations. Different neighborhoods have different growth rates, even in the same city. Try to branch out and get properties in multiple locations.
- Commercial and residential real estate. Commercial and residential real estate both have unique advantages, so invest in a mix of both (after getting to know the commercial real estate market a bit better).
- Secondary forms of income generation. Consider using secondary forms of income generation at your properties, such as adding vending machines or a coin-operated laundromat area. It won’t double your income, but it will make your revenue stream stronger.
Investing in real estate isn’t a guaranteed path to success. You’ll need to do your due diligence and scope out properties carefully. However, with enough time, effort, knowledge, and experience, you’ll eventually polish your real estate investment strategy to perfection – and reap enormous financial rewards.