Starting Your Real Estate Portfolio
America is a nation of HGTV fanatics, Selling Sunset obsessives, and Zillow sleuths. Real estate is the one asset we all agree on, and for good reason: nothing else serves as both a vehicle for creating generational wealth and an indicator for the country’s overall economic health. This singular position as hybrid status symbol/investment tool has created an environment where everyone wants in, but few of us have an understanding of how to get our foot in the door, or what to do once we’ve finally pried that door open.
The Empowered Women team is here to demystify the process. Buying property may be the most complex transaction any of us ever make, but don’t let that deter you from taking the plunge. With patience, persistence, and more than a little research, you can build a real estate portfolio in line with whatever your financial aspirations may be. After all, a man’s house may be his kingdom, but a woman’s?
That’s her wealth strategy.
First thing’s first, the disclaimer that no one else wants to give: contrary to every single house-flipping celebrity that ever pretended to swing a hammer, owning real estate isn’t sexy. Property ownership may result in flaky tenants, irritating HOAs, and a perpetual sense of sticker shock; side effects may include foul language and a slight phobia of paperwork.
In summary: responsible real estate investment is the opposite of glamorous, and it’s definitely not passive. But the least thrilling part of it all? You have to get your finances in order before you even think about buying property.
If you wouldn’t build a house without properly laying its foundation, you shouldn’t buy a house without laying an equally sound financial foundation. Real estate requires the same preparation as any other investment, and as our resident financial maven Michelle Fuccella would counsel, you should have three things in place before pursuing an investment: an emergency fund, healthy savings, and a realistic budget to help guide you. The same applies to property ownership.
The main distinction, of course, is that real estate costs a bit more than most stocks. Here we fall back on another bit of finance 101: the larger the purchase, the more you have to save. Our other founder, Jennifer Varteressian, can attest; before acquiring the properties in her current portfolio, she saved an average of 50 to 60 percent of her salary each year. This meant forgoing the indulgences typically associated with success in our 20s–luxury apartments and sleek cars–in favor of cost-effective alternatives (we warned you, not sexy).
As you start your own real estate journey, follow Jen’s lead and save as much as you can to keep yourself in good financial shape, and never make decisions based on emotions. Once you’ve done the unglamorous work of scrimping and saving to purchase your first property, it’s time to lay the groundwork for your portfolio.
Start by finding a good real estate agent and a good lender. Agents always come first to mind when we think about buying a property, but who you use for financing arguably has a bigger role in your ability to execute your vision for your portfolio. Both your agent and your lender will be key to your success, and both will help you establish a strategy to accomplish your personal real estate goals. Whatever strategy you choose should take into account some fundamental truths, however.
Research into the local area is paramount before purchase.
Keep in mind that location is the only thing about a property that you can’t change, for better or for worse. On one hand, less than desirable buildings situated in desirable areas can still represent an opportunity, as virtually any other aspect of the property can be renovated, redesigned, or otherwise modified; on the other, a beautiful house in the wrong place could potentially never provide the return on investment you’re looking for, or perhaps even depreciate if conditions in the area deteriorate.
By the same token, since the value of a property is determined by more than just the structure itself, then the actual cost of a home is more than just its purchasing price. Always factor in furnishing, repairs, taxes, and unforeseen expenses into any hypothetical budget you draw up for a property you want to buy. For this reason, we suggest having an emergency fund for each and every property you come to own; you never know what costs may pop up out of the blue.
The role a home plays in your portfolio can likewise be complex; appreciation and stable cash flow may not always be simultaneously possible for a particular property, but even properties which don’t generate the best ROI can still be leveraged for the purposes of tax mitigation against the rest of your portfolio and ultimately increase your net income even without increasing your overall revenue.
One last piece of advice: while interest rates do play a role in the cost of a house, remember that refinancing a loan is always an option down the road. If the purchase price appeals to you, and the interest would still be in budget, don’t let today’s high rates deny you tomorrow’s profit.
With all of this front of mind, you’re ready to make your first purchase. The first home you buy will determine how your portfolio progresses then on, so choose wisely, and never choose the most expensive option when first starting out. Your primary residence will just be the beginning of your portfolio.
If you’re reading this, you don’t want to stop at just one property, but scaling from owning one property to multiple is a complex process with several paths to success. In conjunction with your agent and your lender, you decide the best way to proceed for yourself; that said, there are some overarching details that you should be aware of.
We highly suggest taking advantage of the more favorable loan terms offered for primary residences whenever possible. Typically speaking, barring certain exceptions, you must live in any residence deemed your primary for at least year before you can be considered for a similarly favorable loan; however, once your year is up, you’re free to lease out your current primary as a long-term rental and seek another property to buy as your new primary residence.
The benefits of this approach are twofold: the terms offered for a primary residence–chiefly a low required down payment of 3 to 5 percent, plus lower relative interest rates–are much better than those offered for second homes–down payments of 20 to 25 percent, plus higher interest rates. Additionally, any time you have a long-term renter in one of your properties, banks will apply 75% of the rent paid by your tenant against your debt-to-income ratio, meaning that you will qualify for better homes as you seek more properties to add to your portfolio. You can continue this strategy year after year if you wish, as long as you spend at least a year in each residence you designate as your primary and can continue to find renters for your properties. In the event that you would rather not leave your primary, you can always acquire a second home, but you are limited in most cases to owning only two.
If long-term rentals aren’t your thing, we would be remiss in not discussing another popular strategy of turning residential properties into cash flows: Airbnb. To be fair, it hasn’t gotten the best press post-pandemic; a quick Google search will tell you how bleak the market is these days for hosts trying to eke out a profit through the app. But just like with today’s high interest rates, don’t let bad press and fear immediately scare you away.
Good investment opportunities in the short-term market still exist; you just have to be willing to do your homework.
If you’ve found a house for sale that you think would be a good Airbnb, we suggest using AirDNA to vet the property prior to purchase. It’s worth the fee to get a decent estimate for much to expect in revenue from any home. Additionally, look into how saturated the local market is with preexisting Airbnbs and other rentals to help inform your purchasing decision.
Once you have a property to use as an Airbnb, it’s important to remember that you are now the proud owner of a hospitality business; being a host is the opposite of passive income. You will have to ensure guests’ needs are met, keep your properties well maintained, and bring in a steady stream of positive reviews to attract new guests. Airbnbs can be a great way to leverage your portfolio, but unless you have a luxury property in an area where you can find a high-quality management company, you’ll be doing most of the work yourself. Look elsewhere for passive income streams.
Don’t fall into the decoration trap, either: just because you make your space beautiful doesn’t mean you will hugely increase your revenue. If anything, having an aesthetic Airbnb will simply give you a (slight) competitive edge relative to similarly positioned properties. In the end, your Airbnb will live and die by the reviews you get.
If we had to sum up the last 1,500 words, we would leave it at this: real estate is complicated. There will never be substitutes for due diligence and elbow grease. But even though it may not be the passive process we wish it was, we still believe property ownership is an amazing way to grow your wealth and contribute to building an exceptional life. We hope this article plays a small part by giving you a useful launchpad for starting your own portfolio; if nothing else, at least now when you’re watching your favorite flipper on HGTV, you can judge for yourself exactly how much they’re leaving out.
