See how to build a property portfolio to reduce risk and maximize return
How do you build a portfolio of real estate strategies that not only limits your risk but maintains those double-digit returns?
It's a question most real estate investors don't even know they need to ask. They've read some ‘experts' book on rental properties and think that's all there is to know about getting rich in real estate.
Then a crash comes. The investor is bankrupted and investors with diversified portfolios swoop in to buy the properties for pennies on the dollar.
In this video, I’ll show you exactly how I combine three real estate investments to eliminate risk while still making returns of 18% or more a year.
This is a three-part series on real estate investing with a start-to-finish approach to making your millions in property. Click through and subscribe to the Let's Talk Money channel to watch all three.
How to Build a Property Portfolio
In our last video we looked at four real estate investing strategies and why it’s so important to not just focus on one strategy but to be developing that income stream from at least two or three. Each of the four; so rentals, flipping, wholesaling and crowdfunding have their advantages but also some disadvantages that are going to be setting you up for failure if you’re only in one strategy.
A lot of this is in the cost and time commitment it takes to be in rentals or flipping or the lack of diversification when you only have one property type in one area.
It’s something that most real estate books or videos don’t talk about, that if you are in just one of these strategies, taking all those risks then there will come a time sooner or later that your business comes very near to failure or you’re pushed into bankruptcy.
So you need to take a portfolio approach to real estate investing, just like you would in stocks. If you invested exclusively in tech stocks, you would have been absolutely wiped out in the tech bust. In fact, it took the Nasdaq index of tech stocks 14 years to get back to the peak reached in 2000.
Investing in just one sector of stocks is ridiculous. Everyone knows that. Instead, you create a portfolio of tech for growth, utilities for cash flow, staples for safety along with other sectors.
But why doesn’t anyone do this in real estate investing? It makes no sense and is why real estate sees the highest incidence of bankruptcy among investors.
Two Secrets to Successful Real Estate Investing
So what we’re going to do in this video is show you how to create that portfolio of real estate investing strategies. I’m going to reveal how you can combine some of the strategies we talked about in the last video to reduce your risk, smooth out those cash flows while still getting a high return on your money.
There are two things you want to do when creating your real estate portfolio, first is you’re trying to diversify your assets. You want to reduce your risk around any one property type or region.
For most investors in residential real estate, this means getting exposure to commercial properties across the country. You’ve got this spectacular rental business in your area but you need to smooth out those risks with the other property types like office, warehouse, retail, hotel and storage.
The second thing you want to do when creating your real estate portfolio is you’re trying to address those disadvantages in your primary real estate strategy. For most people, that means finding some investments that don’t require the big down payments and work that comes with rentals or flipping.
My Real Estate Investment Portfolio
Let’s look at how I’ve diversified my portfolio, I’ll walk you through each and how you can create your own property portfolio.
So I have three rentals, two single-family rentals and a partnership ownership in some commercial storage units. That direct real estate is about $182,000 because I own one of the houses with no debt.
The cash flow from these is great but that’s a lot of money in just two geographic areas, in Des Moines and here in Medellin, and most of it is in one property type. Also, while I’ve always taken the time to find good tenants, there’s still some management time that I have to spend every month for the properties.
I love real estate and truly believe it is the single best asset to make you rich but with my full-time business, I don’t have the time to manage the portfolio of properties I’d like to hold.
So I can put more money in real estate and get those long-term returns that beat stocks and blow the doors off bonds, I have two more strategies that I use in my portfolio, real estate investment trusts (REITs) and real estate crowdfunding.
Again, we’re going to be talking through REITs and real estate crowdfunding next but through these REITs, so I have the Vanguard fund here which invests in real estate companies in different property types and across the country. It’s an excellent fund that pays a 3.6% dividend and a total return of 10% annually over the last decade.
Then I have these individual REITs in property types and companies that I really like for growth including data centers, student housing and healthcare. That REIT part of the portfolio is about a quarter of the overall portfolio, provides solid cash flow and absolutely no work.
We’ll get to some of the disadvantages in REITs and why I use real estate crowdfunding in the portfolio next but here I have about 14% of the total portfolio in individual crowdfunding projects. That’s split about equally between debt and ownership investments. The debt provides solid cash flow and a little less risk while the equity investment provides higher returns.
So you can see that my overall portfolio is a little more than half in residential properties but still has 40% in commercial property types.
Through those REITs and crowdfunding properties, I have investments across the United States so I’m not relying on any one area and more than a third is in investments that don’t require a lot of management on my part.
From this portfolio, I not only diversify away all my risk in a property type or in a region but I’m not spending time every week managing it and I get returns 18% and higher every single year.
Why I Invest in Real Estate Crowdfunding for My Property Portfolio
But I know a lot of you are saying, well why not just invest in REITs instead of adding crowdfunding so I want to talk a little about why you need to be combining real estate crowdfunding into your portfolio, some of the ways it addresses the weaknesses in REITs and then I’ll walk you through one of the sites I invest on, EquityMultiple.
I love REITs, real estate investment trusts. They’re special companies that hold real estate, they get a special tax break if they pay out most of their profits to investors so they are dividend machines. REITs trade just like stocks so you can buy them on any online platform. It’s a great way to get some of that exposure to commercial real estate for your portfolio.
But REITs also have a few disadvantages that means you really don’t want to rely on them completely.
First is because REITs trade like stocks, they are a lot more volatile than traditional real estate. That Vanguard REIT fund, when the bottom dropped out of stocks in 2008, the REIT fund plunged over 60%.
It took six years for the fund share price to recover to its prior peak. If you had other real estate investments, sure the property price might have dropped but you were still collecting that cash flow.
Another reason to invest outside of REITs is for the return. REITs provide a solid return similar to stocks but that’s still not even close to what you get on direct property ownership or in real estate crowdfunding.
I average 9% on real estate debt investments and 15% or higher on equity investments in crowdfunding. Both the REIT investment and crowdfunding require no management on my part so adding crowdfunded properties here boosts my overall return without extra risk or work.
Finally, because REITs are billion-dollar companies with hundreds of properties, you’re going to have less control or information about what you’re investing in. The company is going to invest in a specific property type and maybe in a list of regions but you really don’t know what the manager is going to buy.
You’ll also get a sense that sometimes because they have so much money they have to reinvest for growth, that the quality of deals suffers.
By comparison, when you’re investing in real estate crowdfunding deals, you’re looking at a specific project. You get to see all the financials and cash flow for a project and you fill your portfolio with only the best deals on properties. Since projects are usually from two to five years, you’re not locked into a project for decades like when a REIT managers buys something.
With real estate crowdfunding, I’m able to address all the disadvantages in direct property ownership but still able to get higher returns compared to REITs.
How to Invest on a Real Estate Crowdfunding Site
If you missed our last video describing the real estate investing strategies, real estate crowdfunding is just the social media revolution meets real estate investing.
Developers and professional investors submit their projects to online platforms like EquityMultiple. They apply for either debt or equity financing, so for a loan or to sell ownership in the property. These can be anything from a huge commercial development to a small retail property. EquityMultiple doesn’t originate loans itself but syndicates loans originated by quality lenders.
The platforms have teams of underwriters and analysts that look over these deals, doing the due diligence on developers and the properties. They look at the developer’s record, they look at legal ownership of the property and look at the financial projections on the project.
If everything passes this inspection, and only about one in 20 are usually approved, then the project goes on the website for investors to see.
As an investor, you look through projects on the platform and can invest as little as $1,000 in most. So these platforms make it easy to get that exposure to commercial property and in other regions to really fill out your portfolio.
EquityMultiple is the only online platform backed by an established real estate company, Mission Capital.
That gives it deep experience in finding and vetting those potential investments for the site. The team has decades of experience in development and investment and has closed over $75 billion in real estate transactions.
The process to invest is seamless and you set up an account in a few minutes. One note here is that you do need to be an accredited investor to sign up on the platform. After you set up your account, you’ll be able to review and invest in projects with three different structures; debt investments, preferred equity and an equity ownership in the properties.
One of the things I like about EquityMultiple is that the projects are institutional-quality. That means you don’t find some small single-family house flip like you do on other real estate crowdfunding sites. These are all large commercial projects developed and managed by professionals.
Another set of closed projects here, this one with some property type diversification with an office property in D.C., student housing in Mississippi and a multi-family in California. Target rate of returns are all 15% and higher on projects of 18 months to three years.
Signing up to EquityMultiple, you’ll create an account with your email address and then confirm that you’re a U.S. citizen or resident. You’ll then self-certify that you are an accredited investor through either the income or net worth criteria.
The final questions include your address, employment information and investing experience and that’s it. You’ll be able to review available projects and can invest as soon as you fund your account. The entire process takes less than five minutes.
In our last video of the series, I’ll show you how to analyze real estate crowdfunding projects, what you need to look for to pick the best projects for the highest returns. I’ll reveal the five factors I look at before investing and show you how to build a diversified portfolio within that crowdfunding portion of your overall portfolio so be sure to hit that subscribe button so you don’t miss it.