How to Build a Real Estate Portfolio in 11 Steps (2024)

Building a real estate portfolio can be the first step toward long-term wealth and financial security. Like an investment portfolio, a real estate portfolio balances risks and rewards in the aim of creating steady growth. The multibillion-dollar U.S. real estate industry has shown steady growth for years. IBISWorld report estimates 3.4% growth in 2022.

Whether you want to capitalize on long-term appreciation or create positive cash flow through rentals, a real estate portfolio can offer strong returns. Read on to understand how to build a real estate portfolio.

What is a Real Estate Portfolio?

A real estate portfolio is the selection of properties owned by individual investors. While any homeowner technically has a real estate portfolio of one property, the term usually refers to owning multiple properties with the intention of long-term wealth building. In a real estate portfolio, you'll want to balance risks and build positive cash flow.

A real estate portfolio is a collection of real estate investment assets. It can be a comprehensive document that details your past and present real estate investment assets and may include rental properties, flipped homes and real estate investment trusts (REITs).

Whether you choose to purchase rental properties, commercial real estate, REITs or a combined real estate investment strategy, building a real estate portfolio requires research and market understanding.

How to Build a Real Estate Portfolio in 11 Steps

Whether you're ready to purchase your first investment property or want to know how to build a real estate portfolio fast, here are the steps to take.

1. Set Your Investment Goals

Investment goals usually fall into short-term or long-term categories. Short-term goals may include positive cash flow in the first year or generating a positive return on investment (ROI) within five years. A long-term goal could involve a 20-year appreciation or total cash flow and asset value you'd like to build over time.

As part of this step, it's important to identify your risk tolerance. Risk tolerance is the amount of risk you're willing to accept on your investments. Usually, higher risks can lead to higher returns, but they can also lead to substantial losses. Risk tolerance isn't just an intellectual decision; each investor has a unique emotional constitution that affects how much risk they can comfortably withstand.

Armed with an understanding of your risk tolerance and short- and long-term financial goals, it's time to make a concrete plan.

2. Create a Financial Plan

Assessing your financial position and budgeting for real estate investment is essential to portfolio building. You can pay for new real estate investments with cash, conventional financing like a mortgage or refinance or through a private lender. Consider the amount you have in savings or cash investments and the total loan options you could leverage to purchase properties. Don't forget to account for closing costs, ongoing maintenance costs and potential vacancies in rental properties.

3. Research the Real Estate Market

The third step is perhaps the most important. To successfully build a real estate portfolio, you need in-depth market knowledge. Understand market trends, identify target neighborhoods with strong investment potential and track prices on comparable properties.

Speak with local realtors, real estate professionals and other real estate investors to understand local zoning opportunities and market trends and locate current investment opportunities. As building a real estate portfolio is a long-term project, setting up alerts for under-market value listings can help you take advantage of desirable listings in target areas.

4. Finance Your Real Estate Investments

You can finance a real estate investment portfolio through private funding or loans, multiple traditional mortgages or with your own funds. You can network with other real estate investors and build connections to create new opportunities for leverage in real estate investing.

Investors commonly secure more funding by using money from refinancing other properties. With this strategy, you'll get significant tax advantages as you're using the appreciation of your property value in the refinance to get more funds to buy new properties without triggering capital gain taxes from selling properties. You'll need to already own properties that have appreciated in value to make this happen.

5. Select the Right Real Estate Investment

There are diverse types of real estate investments with different potential risks and returns. These include:

• Single-family residential properties
• Multi-family residential properties
• Commercial properties
• Vacation rentals
• REITs

You can buy any of these properties to hold and rent long-term, use for short-term rentals or buy and flip for a profit.

Once you've found a property you're interested in, hire professionals for thorough inspections, verify legal documentation, ensure the property doesn't have liens or mortgages on it and determine that the title is free and clear. Learn more about buying your first rental property here.

6. Negotiate and Close a Real Estate Deal

Even a small price difference can affect the bottom line in real estate investing. Make an offer backed by strong market research to increase the chances of closing. You can purchase the property for a lower price by offering an all-cash purchase for a fast closing.

Once you make your offer, the seller has a set time stated in the offer to make a counteroffer. When you receive the counteroffer, consider whether it fits within your real estate strategy and goals.

Working with established real estate agents who can provide market insights and guide you through negotiating for a property and closing the deal can be helpful. They will also help you review contracts and agreements before signing. For investment purchases, hiring a real estate lawyer to review the contracts and agreements before you sign is useful.

7. Establish Property Management Strategies

Once you have purchased a property, you'll need to decide whether you will manage it yourself or hire a property manager. While property managers usually take a percentage of rental income or a set monthly fee, they can give you peace of mind and ensure the property is well managed.

If you choose to manage the rental property yourself, you'll need to stay on top of maintenance and respond quickly to repair requests or concerns. Good tenant relations are essential for long-term property success and tenant retention rates.

8. Evaluate Portfolio Performance

Like any investment portfolio, you'll want to track performance and metrics. Are you generating positive cash flow? Are asset values increasing? How does portfolio performance compare to the financial goals you set in the first step?

Once you've tracked performance, you can identify areas for improvement. This steps might include reducing vacancy rates, improving tenant relations or undertaking property renovations that can increase its income-earning potential.

9. Scale and Diversify Your Real Estate Portfolio

Once you have one successful real estate property in your portfolio, it's time to expand. You can use the same formula as the first property or purchase a different type of property. Plan to reinvest profits for growth or to secure financing for a new market.

To increase portfolio diversification, consider expanding to new markets, balancing property types or expanding for geographic diversification. These diversification strategies can help ensure that a single natural disaster or market downturn won't affect your overall real estate portfolio performance.

10. Real Estate Tax Considerations

Investors gain potential tax benefits from real estate investing. Without careful planning, you could end up paying extra in taxes, especially when you sell a real estate investment property.

You can use tax write-offs to deduct expenses related to investment properties from income to reduce total tax burden. Likewise, you can deduct depreciation costs over time. You can reduce or eliminate capital gains taxes when you use capital gains to purchase a new real estate property in a Section 1031 exchange. Speak with a certified public accountant (CPA) or tax advisor to understand your situation's potential tax benefits and write-offs.

11. Adapting to Market Changes

Charging markets can mean previously dangerous neighborhoods gentrify or large, lucrative malls sit empty. Stay connected to real estate agents and local investors to keep track of market changes and long-term trends. Market fluctuations are part of any investment strategy. Consider when it's better to ride out a downturn and when you need to sell a property before it loses value. It's essential to pivot your investment strategy to adapt to changing market conditions and new investment opportunities.

Best Platforms to Build Your Real Estate Portfolio

If you're ready to start building your real estate portfolio, these platforms can help.

Expanding Real Estate Investments

With the 11 steps above, you can purchase your first or one-hundredth rental property. The advantages of building a real estate portfolio include creating positive cash flow while building asset values. With time, you can leverage that value to purchase more properties, creating a long-term sustainable wealth-building strategy. Learn more about ways to start investing in real estate here.

Frequently Asked Questions