Building property portfolio may pose a daunting pursuit. There are several aspects of the business which you have to be knowledgeable to make sound decisions. Some of the challenges are the lack of cash flow and initial costliness of borrowing initial capital.
However, you should determine which types of property and strategies are profitable and viable over others. You have two options on building property portfolio:
Property development: You orchestrate the business process. It can either be from end to finish. Or can be just one or a few of the activities which can cover the purchase of vacant land; the building of property from scratch; and the renovation of a property.
Purchasing already built property: this move is advantageous when a property commands a lower selling price but, given certain market conditions, can fetch a higher resale value. Some businesses that lease space also opt to buy ready-built buildings or facilities unless their operations require tailor-fit specifications.
Ways of investors to build property portfolio
1. Savings and investments
Storing your money in the bank will only keep you from realizing the maximum gains that money can offer in return if only you consider putting them into investment vehicles instead. Rental and resale of property have been seen as a fairly stable source of income and can bring much more than a bank’s hike rate on savings untouched for a year, which more often than not, can’t even beat the inflation rate.
2. Loan
If you’re tight on cash or unwilling to shell out a significant sum in one go, you can always apply for a loan from banks or other financial institutions. There are several loan types where real estate is concerned:
Mortgages
You can use a mortgage to purchase a property. Lenders take the property you are buying as collateral, meaning if you don’t pay your debt on time, the lender can take possession of the property. Mortgages also allow for a buy-to-let finance scheme.
Bridging loans
Bridging finance is flexible enough to serve several purposes. You can even use them to purchase or develop a property and have more lenient eligibility criteria compared to other commercial loans or mortgages.
Construction finance
You can tap construction loans if you’re also the builder of the planned property. Some lenders can deposit financing for your construction needs as soon as you can provide receipts on outstanding obligations your clients owe you.
3. Work with investors
If you know people who are also eyeing a share of the property market, you can always gather them to share the costs and risks in the business, then apportion the equity of the property in accordance to their investments when building property portfolio.
This is an excellent option if you’re a first-time investor or you’re unwilling to spend for the entire cost of developing or purchasing a property.
You can also offer this investment opportunity to family and friends seeking extra income.
Exit strategy to build property portfolio
An exit strategy refers to how you intend to profit from the property you developed or have invested on. Most investors have an exit strategy even before implementing their overall business plan. This way, investors can minimize future risks. However, even experts know that
exit strategies often don’t go as planned as market conditions and the more practical reasonable exit moves tend to become more evident after the property acquisition or groundbreaking.
There are several ways you can gain in the property market:
Fix and flip
Fix and flip involves the purchase of investment properties that are sold below market value but have the potential to sell higher with a with repair and refurbishments. Before purchasing the property, estimate the overall renovation costs and assess whether it can sell at a price that exceeds your purchase and repair costs.
Buy to let
Investors wanting to purchase a property can lease it out to tenants whose pay for rent can be used to meet the mortgage or loan repayments.
You can choose to hold off on liquidating the property and lease it pending the right conditions that will maximize your potential profit or sell it once your tenant’s payments have met your borrowing obligations, thus, places the property as an asset you can sell off.
Rent to own
Unlike buy-to-let, rent-to-own has the end goal of disposing of the property altogether. The longer the term the buyers choose to pay for the property, the higher the overall selling price. This type often carries out more profit than only selling off a property you would like to get rid of.
Key things to consider
Decide on your location
The location you choose should have a community with an appetite for rentals or property purchasing. An area reflects this demand through its economic and population growth. Look further into the real estate taxes imposed in the area and how these compare with nearby towns or cities.
You can opt to buy a location within proximity to a commercialized area, which may be costlier than when you choose to purchase property in an underdeveloped place—when opting for the latter, make sure developments are underway to make the area habitable.
Have the property inspected by a professional
Make sure the property is in good shape before buying it. Hiring inspectors is the best option, especially when eyeing for an old or decrepit property. The inspectors can also give you a rundown of the possible repairs needed as well as their corresponding costs.
Target the right tenants
The flow of your income depends on the payment of your tenants. Set standard requirements, like a monthly average income or a credit score, for your tenants
Knowing your prospective tenant before buying or building anything will help you determine the right kind of property to invest in and narrow down your selection of locations. If the area you’re targeting, for instance, have more family-residents than young single people, then there is a better chance to sell off a spacious house that is near a school than small-sized condominium units.