We all want to build a portfolio of properties that earns money and allows you to live with less stress and less worry. With the right strategy, you can build an investment portfolio that earns money from the very beginning.
Use these simple tips for building an investment property portfolio that earns an income…
9 Tips for Building an Investment-Property Portfolio that Earns an Income
1. Monthly Rent Checks Should Be More Than the Monthly Cost of Ownership
Pretty basic and simple math. If you are purchasing a property, look for ones that can be rented out at a price that is greater than the monthly cost of ownership, including mortgage payments, taxes, maintenance, and more. You also want to factor in the potential losses from a vacant property, as this could occur from time to time.
2. Buy Low-Price, High-Value Properties
You should avoid purchasing old, run-down, dilapidated properties, but you should also avoid stretching your cost by purchasing high-dollar properties. Instead, look for sturdy, well-build homes in quality neighborhoods that bring a good value; ones that don’t cost an extreme amount to purchase, but can also be rented out at a price that brings real profitability to your portfolio.
3. Buy in Areas Where People Commonly Rent (College Towns are Ideal)
When building an investment-property portfolio that earns an income, you obviously need tenants. A business can’t make a profit without customers, just like you can’t make a profit without people to live in your houses. College towns are ideal, as there are many possible tenants. Other areas include neighborhoods near business centers, and places near attractions, such as beaches, parks, or lakes.
4. Buy in Areas That You Know
If you can’t decide where to purchase your investment properties, start with an area you know. Choose properties in a city or neighborhood where you have lived in the past and you’ll be better equipped to make the right choice. You’ll be more informed on where people want to live, which areas are likely to grow in value, and how much you can earn from a property. A lot of research is still involved, but being familiar with the area gives you a head start.
5. Have an Emergency Fund for Expenses, Maintenance, and Repairs
Saving money can be difficult, especially of you are on a tight budget. However, if you don’t have at least a small emergency fund to deal with property repairs and other issues, you may be tempted to use high-interest debt. Having an emergency fund is not only financially wise, it also relieves some of the stress and worry associated with owning property. (And having a stress-free life can be priceless!)
6. Use 1031 Tax-Deferred Exchange to Sell Properties and Fund Larger Purchases
A 1031 exchange is a tax-deferment strategy used by many successful investors. It can be a little complex, but basically is a strategy that allows you to defer taxes on capital gains when you sell a property by purchasing another property. Say you have a property which you bought for $200,000 and will now sell for $250,000. In this case you would normally pay capital gains taxes on $50,000 worth of profit. With a 1031 exchange, if you immediately purchase a similar property with the profits, you can avoid paying taxes until to sell the new property. This can be used, for example, to shift from a property that requires a lot of maintenance, which eats up profits, to a property with less maintenance, all without incurring a higher tax obligation.
7. If You Can, Avoid Property-Management Companies
There are many costs that chew into profits, including taxes, maintenance, and advertising. Some are unavoidable (like taxes), while some can be avoided. One that can be avoided, although it makes being a landlord more difficult, is paying a property-management company.
These companies can be a useful ally, but they come with a cost. If you can handle many of the tasks, such as home repair, yard maintenance, and collecting rent checks, then you may want to avoid a property-management company.
The best strategy? Try owning properties without hiring a company; if it doesn’t work out, you can always hire one later.
8. Get Rid of Dead Weight: Sell Properties that Aren’t Earning
Many landlord hold on to their properties for far too long, holding out in the belief that they will eventually turn a profit and become a useful asset. However, it may be better to be a little ruthless when it comes to keeping or selling properties, and many investors would benefit from selling, even if you have to sell for less than you bought.
It can be difficult to decide, so look at it from another perspective: the reverse-cost analysis. Say you have a property that was purchased for $400,000 that has been nothing but a drain on your profits. You’d like to sell, but you would only fetch $350,000, a loss of $50,000. Seems like it would be foolish to sell, but if you look at it from a reverse side, you’ll see that selling is wise. Basically, ask yourself this: would you, if you had $350,000 in the bank, purchase the property? If the answer is no, then you want to sell.
Getting rid of dead weight on your finances could be extremely beneficial to your overall profit levels.
9. Use an LLC to Reduce Risk
Part of being a good landlord is understanding how to reduce your chances of a significant financial loss. There are many things that could cripple your real-estate portfolio, including large amounts of high-interest debt, natural disasters (especially if your are not properly insured), and law suits. To protect yourself and your investments, use an LLC. As an LLC, your real-estate properties are classified basically as a business and are legally separate from your personal finances, reducing the risk to both entities.
Enhance Your Portfolio with a Quality Mortgage
Need a reliable loan for your next investment property purchase? Contact the staff at San Diego Purchase Loans today and we’ll help you find a mortgage that allows you to build an investment-property portfolio that earns a strong income!