What kind of growth are you trying to achieve with your real estate portfolio? Are you hoping to acquire additional properties, diversify what you own, or leverage the assets you currently have to earn more money from them? Are you putting together a plan that combines several different strategies?
Smart real estate investors are always looking for ways to increase the size and strength of their portfolios. You want to continue looking for opportunities and finding ways to challenge yourself.
It is always a good idea to periodically review your investment goals. When you started investing, it may have been with different priorities or expectations. The market has changed. The availability of investment properties has shifted, and the entire rental landscape in California presents new challenges and requires creative thinking.
As you think about how to grow your real estate portfolio, make sure you’re surrounding yourself with professional partners and paying attention to their advice and insight. As property management and real estate experts, we are constantly studying the market and supporting the investors we work with as they grow.
We know that your growth is unique, and so is your investment journey. However, we do have 5 tips to grow your real estate portfolio that will work for just about any investor. Whether you’re new to real estate or experienced, interested in multi-family buildings or single-family homes, hoping to grow quickly or steadily, these tips can help you have a better investment experience while you watch your earnings and your assets grow.
Consider a 1031 Exchange
One of the easiest ways to grow an investment portfolio is by adding to it.
If you’re not sure you have the capital or the credit to buy another property, you might want to think about trading something that you currently own for a more valuable property or two.
How does this work?
It’s called a 1031 exchange, and it’s an IRS-approved program that real estate investors use to save money on taxes and make some changes to their current investment portfolios.
You get started by selling an investment property that you currently own. Maybe you have a rental home that isn’t performing as well as you’d like. You’re having trouble attracting and retaining tenants because the neighborhood has changed or the maintenance expenses have grown more and more expensive and you can’t seem to keep up. Whatever your reasons for wanting to move on from that particular property, you can sell it.
When you sell, the 1031 exchange allows you to avoid taking the profits that you earn from the sale. Instead of depositing that money, you use the funds to re-invest in a different investment property. You defer the capital gains taxes you’d have to pay on the sale of your initial property, and you grow your portfolio by adding a property that’s likely to earn more money for you. If you structure the deal right, you can even add two properties in exchange for the one you sell. Think about selling a single-family home and buying a duplex, for example.
There are some specifics to the 1031 exchange that you’ll need to understand and comply with:
- You have to exchange like properties. This doesn’t mean they have to be the exact same, but you have to sell one rental property and buy another rental property. You cannot exchange the home you currently occupy yourself and you cannot sell an investment property and buy yourself a second home. You’re exchanging one income-producing property for another income-producing property.
- There are timelines to follow. Once you sell your property, you have 45 days to identify a replacement property that you’ll plan to buy. Then, you have 180 days to close on that property. The entire exchange must be completed in 180 days; the 180 days do not begin after that 45 day period.
You’ll also have to work with an intermediary who will hold the proceeds from your property sale in escrow until you’re ready to put them towards a new purchase. You cannot touch that money yourself.
A 1031 exchange is an excellent way to grow your portfolio if there’s a property that you don’t believe is serving your investment goals, and you’re ready to do something different.
Increase Rents and Value with Improvements and Upgrades
Instead of acquiring new properties, you can grow your portfolio by making your existing investments more profitable.
Take a look at improvements, renovations, and upgrades that you can make to existing rental homes. When you’re willing to make your rental homes more attractive and modern, you’ll have an easier time attracting and retaining high quality tenants. You’ll also increase your rental value and the overall value of your asset. This will strengthen your investment portfolio and allow you to increase your earnings over the short and long term.
Where should you start?
It depends on your property. If you have a well-maintained home to begin with, you likely don’t need to undertake a full renovation or a complete rehab. Instead, look for cost-effective projects that will give you an immediate boost in income and value. Some of the improvements we often recommend look like these:
- Fresh paint is always a good way to make your property look modern and welcoming. Check your exterior paint as well as your interior walls. Invest in durable, quality paint that will hold up against high tenant traffic. Pay attention to details, too. By painting the baseboards and the ceilings, you can make your rental home look and feel brand new. Fresh paint on the front door can increase your curb appeal.
- Replace carpet with hard surface flooring. This is an upgrade that has a noticeable impact on your rental value. Tenants will appreciate updated flooring because it’s easier to clean and maintain. It’s also healthier; allergens and odors and dust and dirt can easily get trapped in carpet. Pet odors are especially problematic. Hard surface flooring looks better and saves you money during turnovers. You’ll replace it less frequently than you would replace carpet.
- Update your appliances if they’re looking old and worn. Energy efficient models are going to increase your rental value, attract tenants, and save money on electric and water bills.
These are just a few examples of how you can grow the value of your portfolio by making some easy upgrades and updates.
Leverage Your Equity
Leverage helps you buy more without using your own money.
This is a tool that a lot of real estate investors use to grow their portfolio without putting a lot of cash down in order to acquire homes. You can use leverage by taking out mortgages and loans to buy additional properties and you can also leverage the equity you have in existing assets.
When you leverage the equity in your existing portfolio, you can get a loan and/or a line of credit based on what your portfolio is worth. This allows you to invest in multiple properties without waiting until you can afford them with the cash that’s currently available to you.
Diversify Your Real Estate Portfolio
Diversifying your existing real estate portfolio can help you grow. If you’ve mostly invested in single-family homes, consider purchasing something else when you’re ready to add a new property to your portfolio. You can buy a duplex or a new construction condo. Similarly, if you mostly focus on units in multi-family buildings or you’ve only ever purchased small apartments, try looking for a single-family home that might allow you to diversify your real estate portfolio.
There are other ways to diversify. Try looking for a commercial property if you’ve focused entirely on residential units. Maybe you’ll want to rent out a vacation home in the short term if your entire portfolio is long term residential leases.
Talk to a property management professional who can provide some insight into how the market is performing and where you may want to strengthen your existing portfolio.
Expand Into New Markets
Have you considered investing somewhere else?
A good way to grow your portfolio is by exploring other markets. If you only own rental property in a single California city, consider looking elsewhere. You’ll need a local property management professional to help you if you’re not familiar with the area yourself. It can feel like a challenge to invest from afar, but with technology and professional support, you can invest anywhere.
Look for markets that have strong local economies and a good pool of renters. You’ll need to know what average rents are, how much you’ll need to spend on a good rental home, and what the tenant pool looks like. Many cities across the country and even across the state of California are seeing an increase in population numbers. That’s good news for the rental market, especially as home prices remain high in the sales markets. Tenants who might have planned to buy might be priced out of the market, and they’ll need to rent for a little longer.
There are a number of ways to successfully grow your real estate portfolio. We’d be happy to talk with you about where you are currently and where you’d like to grow. Contact us at California Pacific Realty, and we’ll make some personalized growth recommendations for you.