Investment Strategies Part II: 6 More Techniques for Improving Your Portfolio
There are hundreds, possibly thousands, of different property-investment strategies you can use for your portfolio. Whether you are investing in one single-family house, or you already have a near empire of commercial properties, strategy matters.
And you don’t necessarily need a perfect strategy. In fact, one could argue that having a decent strategy is better than nothing. Consider the words of Gen. George S. Patton, America’s fiery WWII general who said “a good plan…now, is better than a perfect plan next week.” Basically, he was saying that having a strategy and following through today with it is better than having no plan at all.
With that in mind, let’s revisit our look at investment strategies. Previously, we wrote about common strategies and techniques used for success with property investments and now we’d like to take an even deeper dive into this fascinating topic. (Fascinating, at least to us!)
Investment Strategies, the Sequel: 6 Techniques for Improving Your Portfolio
Note: San Diego Purchase Loans is not, in any way, an investment advisor. This article is for general entertainment and information only, and should not be considered financial or investment advice in any way. Before making any decisions, speak with a qualified expert.
1. Start Small and Affordable, Build From There
With so many successful investors in cities all across the country, it can be tempting to jump in with full enthusiasm and all of your available capital. While using all your enthusiasm is probably good, all of your available capital is certainly not. With that in mind, one of the best strategies is to first purchase a smaller, affordable property, preferably a single-family home. Then, once you have become familiar with owning investment property, you can steadily build your portfolio. Starting small not only reduces risk, it allows you to see, at a gradual pace, if owning rental property is right for you.
2. Live in the Property Now, Rent it Our Later
Another good strategy for beginners is to purchase an investment and use the property as a personal residence for a short time. Many loan programs, especially government-supported loans, have requirements that you live in the property for a certain period, usually a year or two.
You could use these programs to purchase a multiunit property (most programs allow up to four units on a purchase) and rent all but one. Live in that unit for a year or two and rent out the rest, earning (hopefully) enough income to fund the purchase of your next property.
This is a common strategy that is becoming more well known all across the country. Essentially, with this strategy you purchase a property, usually one that is rundown or at least neglected and in need of and update. You then “fix” the property, making it more comfortable, attractive, and valuable. (One hopes.) Then you “flip” it by placing it on the market and selling for a profit.
With a boom of television shows following interesting, flamboyant, and charming investors and builders, it seems that fix-and-flip is a perfect (and easy) strategy for anyone. As you probably guessed, it’s far more difficult than seen on TV, but that doesn’t mean it should be disregarded.
4. Buy, Improve, Rent, Sell
With this strategy, you don’t just sell the property right away. Instead, you purchase a property, make small improvements that enhance the overall value, then rent the property for a certain period, usually no more than five years, although as little as one year is not unheard of.
The overall purpose of this strategy is to force value appreciation in the property by 1) making improvements and 2) letting time increase the value. Through smart remodeling, steadily raising rental prices, and decreasing expenses on the property, you could sell for a significantly higher number than the purchase price.
It’s important to be wise with improvements, however. Not every project will add significant resale value, and, as age-old real estate wisdom holds, you don’t want to own the highest-priced property in the neighborhood.
5. Buy, Improve, Rent, Hold
With this strategy, it’s all about thinking longterm. Instead of selling after even five years, you hold and hold and hold some more. The benefit of this slow-and-steady-wins-the-race strategy is that you can earn consistent rental income, have a tax shelter from depreciation expenses, and can slowly build a large portfolio of properties that are cared for and managed by you.
You can make improvements that increase reliability of the properties, such as installing decent water heaters. It also helps you attract the best tenants, as people often want to rent a home that will have the same owner for a long time. (Predictability is not just important to lenders.)
6. Trade-Up with 1031 Exchanges
In our previous article on investment strategies, we briefly mentioned 1031 exchanges. But these useful tax-code benefits can be used for a specific strategy: building a portfolio by progressively trading upwards.
A 1031 exchange essentially defers capital-gains-tax payments if you sell a property and immediately purchase a new property, basically “exchanging” one for the other. Using this helpful tax benefit, you can steadily move from one property to another, slowly increasing in value. You could, for example, start with a $250,000 property, renting it out for three years. After three years, sell the property and purchase a $350,000, using the proceeds of the sale, tax deferment, and profits from three years of renting.
There is no limit on how many times you can use a 1031 exchange. Eventually, you could use 1031 exchanges to progressively build a portfolio of properties worth millions.
No Matter What Your Investment Strategy, You Need Affordable Loans
No matter how you approach property investments, no matter what type of properties you buy, if you need a loan that fits your investment strategy, contact our helpful staff right away.
With years of experience serving property investors, our team can help you find an affordable loan that fits your goals!