As a real estate first-timer, it can be overwhelming to know where to start. There’s so much going on in the real estate market: What should you do, what should you avoid and how should you approach your investments?
There are so many tips out there, and each “expert” has their tips, most of which are usually contradicting, making it even harder to know what works.
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Many have been in the same situation, and there’s no need to worry. Here’s a breakdown of the steps to double a portfolio within five years, according to Yosef Adde, a South Bay, California realtor and owner of I Buy LA.
And if you’re starting out on this investing journey, you can also check out five ways to invest in real estate on an average income.
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1. Started Small and Local
When you start small, you’re at an advantage because you deeply know the local real estate market. This is easy because knowing the neighborhood well makes it easier for you to find affordable properties.
For example, your very first purchase could be an single-family rental (SFR), which you could get from folks who knew you personally. This could have been a morale booster, which paved the way for future investments.
This is exactly what Adde experienced when starting this business venture.
“Investing in smaller or manageable investments worked as a booster towards building my confidence, reducing risk and fully understanding real estate investment principles,” he said.
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2. Focus on Cash Flow Over Quick Flips
Quick flips can be tempting when starting out. Here’s the thing, though: Flipping denies you the benefits of long-term appreciation.
“Instead of quick profits, I focused on long-term cash flow,” Adde pointed out. “I aimed to acquire properties that would generate consistent income, creating a reliable revenue stream.”
After a year or two, the cash flow strategy paid off. You don’t have just to generate a steady income; cash flow can cover your expenses, and the profits will allow you to buy more properties.
3. Leverage Financing Smartly
Like most first-time investors, you may have limited funds, so you must get creative. And that’s where leverage came in.
Leverage typically comes in the form of a bank loan to buy something bigger than you could on your own. For example, with a mortgage, you could buy properties you couldn’t afford outright. Over time, you will appreciate the property’s value and even get some sweet tax benefits.
However, leverage is a double-edged sword. It can help you grow your investment fast but also comes with risks. You could get stuck making monthly payments that is more than you make from your rental property if you didn’t calculate everything properly.
That’s why you need to focus on properties with positive cash flow. This way, the properties will pay for themselves and even make a profit.
“The cash generated from profit on rental income or appreciation was put into purchasing the next property. It was a form of compound growth that worked in my favor by sustainably growing my portfolio,” according to Adde.
You should always use a 20% down payment on rentals to keep things safe. It keeps your mortgage manageable and your cash flow healthy. You also keep your loan-to-value (LTV) ratios low so you can have more equity and less risk.
Better yet, you can diversify your portfolio — so, if one property has issues, the others could carry the load. In five years, you can double your portfolio by leveraging smartly, balancing risk and focusing on sustainable growth.
Leverage is powerful if you use it wisely.
4. Choose Emerging Markets Over Trendy Hotspots
Instead of going for trendy hotspots, always look for emerging markets. But this should not be the case in the beginning. Some people have lost money on trendy “potentials” with the promise of rental surges in the regions.
“New areas with new markets, infrastructure, new jobs, and increasing demand for housing were some of the major determinants of my market area,” Adde suggested.
You should research neighborhoods that are booming with opportunity and focus on smaller cities that are planning infrastructure improvements with increased job opportunities. For example, you can invest in the outskirts of growing areas instead of pricey downtown areas.
By picking the right markets, you could see incredible returns of up to double within five years. Better yet, you can still reinvest those profits to grow your portfolio.
5. Establish Strategic Partnerships
You need smarter people who are much more experienced than you are to partner with. Collaborating with the best allows you to tap into undervalued markets that later become lucrative.
Here is the tip: Work with brokers and consultants specialized in specific real-estate niches. This is exactly what Adde did.
“I worked closely with local contractors, property managers and lenders who assisted in the processes and, in doing so, helped me clinch better deals,” he explained.
So you must have guys point you toward market trends, hotspots and regulatory shifts that you wouldn’t otherwise know. Work with experts to direct you to the best opportunities to grow your portfolio.
Final Take To GO
The bottom line? The ball is in your court. Following these five moves will encourage you to be inspirational enough to enable you to grow your real estate portfolio.
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This article originally appeared on GOBankingRates.com: I’m a First-Time Real Estate Investor: 5 Moves I Made To Double My Portfolio Within 5 Years