For passive real estate investors, the first two properties are the most exciting!
It’s a time to figure things out. You make a lot of mistakes, learn more than you can ever imagine, and find both the joys and the frustrations of owning passive investment properties. But it’s also not the end—not by far.
From the first investment properties come many more to grow a strong, thriving real estate investment portfolio. This has to be THE goal for passive investors. If owning a passive portfolio is not your stated and nearly obsessive goal, then rethink your position on investing in passive properties. A solid, consistent, performing portfolio can be an absolute game changer!
Often for real estate investors, though, the idea of expanding can be a little overwhelming. Even intimidating. If you wait too long, you’ll have missed opportunities. Too soon, and you could end up straining your resources.
So how do you know when it’s time to expand past those first couple of properties, and how should you go about actually building your portfolio?
The Criteria Before You Grow:
1. The Math Makes Sense
The number one criteria for any real estate investment decision is to ensure that the math works out and makes sense. The numbers are always crucial. Sit down with your books and really investigate what your cash flow looks like alongside your expenses. If you’ve been investing for a while, you know what kind of surprises can crop up and what kind of expenses there will be.
Then decide what you want your target to be. Once you’ve seen where you are, set that next step goal. It won’t hurt to run a few hypothetical numbers as long as you don’t rely on them for decision-making. When you have real numbers, use those.
2. There’s Positive Cash Flow
Obviously, you’ll want to be in a place of stability with the properties you have before taking on something new. Do you have reliable, consistent positive cash flow with your current property or properties? At what margins? Have you maximized your earning potential where you are? Remember, there’s more value in maximizing the potential of what you have than in adding on to something that you haven’t.
If there’s more room to grow, grow first and be patient.
3. You Have the Capacity for Management
One of the biggest mistakes new investors make is growing before they have the capacity to grow. If you have a property management team, this won’t be a problem for you. But for owners who like to landlord, you really have to consider—can you do this on your own? Do you have the capacity to handle another property?
If you’re not sure, you need to be, or think about other solutions to managing your properties.
The Criteria When You Grow:
4. There’s Smart Diversification
For real estate portfolios, there’s always power in diversification. Your investment portfolios, of course, can include other types of investments, but you can be diverse within real estate, too! Maybe you want to branch out into a different neighborhood, a different market in a different city, or a different state. You may want to hit another price point, another type of property, or another kind of investment entirely. There’s room for you to explore, experiment, and diversify. Don’t be afraid to move beyond what you know.
5. It’s a Logical Next Step
That said, remember that a portfolio needs a level of cohesion to it. Is the property you want to buy a logical next step for you? Will it ultimately serve the investment goals that you’re pursuing? For example, if you want to end up investing in luxury condominiums, don’t waste your time with commercial real estate. If you can’t afford what you want right now, you can still work your way up the chain with things in the same vein that will help you gain experience and cash flow. But if a property isn’t ultimately something that serves what you want to do, you don’t need to pursue it.
6. It Leaves a Cushion
By the same token, remember not to put all of your eggs in one basket. When you add another property to your portfolio, it can be easy to rely on the properties you already have that are generating income to support you. But don’t drain your resources in pursuit of a new property—leave a cushion. Just because you can technically afford it doesn’t mean you should buy it. It might not work out like you plan and be the amazing investment you’re imagining!