Alternative Investments

Building a Real Estate Portfolio

In this article, we share the importance of building a real estate portfolio to grow your capital, which may be achieved using a variety of different investment strategies.

RealVantage

12 Mar 2021 • 6 min read

Table of Contents

What is a Real Estate Portfolio?
How to Build a Real Estate Portfolio
a. Learn about Real Estate Investing
b. Create a Real Estate Investment Business Plan
c. Purchase the First Investment Property
d. Analyse the Property’s Performance
e. Purchase More Properties Over Time
f. Diversify the Real Estate Portfolio
How is a Real Estate Portfolio’s Performance Calculated?
a. Net Cash Flow
b. Cash-on-Cash Return
c. Economic Vacancy Rate
d. Capital Appreciation
Conclusion

What is a Real Estate Portfolio?

An investment portfolio may consist of investments across different asset classes, such as stocks, bonds, or real estate. Within an investment portfolio, an investor may have a dedicated Real Estate Portfolio, which is a collection of different real estate investment assets held by an individual investor or an investment group.

While the composition of a Real Estate Portfolio may differ, most Real Estate Portfolios contain assets such as investment properties, Real Estate Investment Trusts (REITs) or real estate mutual funds.

The main purpose of a Real Estate Portfolio is to grow the investor’s capital over time, which may be achieved using a variety of different investment strategies.

How to Build a Real Estate Portfolio

1) Learn about Real Estate Investing

In order to successfully invest in real estate, an investor should make sure they have a good understanding of the real estate industry and the risks involved, so that they can make informed decisions regarding their investments.

2) Create a Real Estate Investment Business Plan

Creating a Real Estate investment business plan consists of a few parts. The investors should have a clear idea of their investment objectives, which may determine the strategy used.

For example, an investor with an objective of generating stable cash flow income is likely to use a core strategy, whereby they invest in a stabilised property and continue renting it out to generate passive rental income. On the other hand, an investor who has more time to devote to the property and wants to generate larger profits may use an opportunistic strategy, renovating an existing property or even developing a new property and selling it, earning profits through capital appreciation.

The investor should also create a financial plan to gauge which properties are within their budget. This ensures that the investor is not over-leveraging when securing a loan for the investment property, and taking on more debt than they can comfortably service. The financial plan should also provide the investor with information to aid in future decisions, such as income and return projections and how much financing they may expect to take on.

3) Purchase the First Investment Property

After creating the Real Estate investment business plan, the investor can begin sourcing for potential investment properties. This may be done on property listing sites such as 99.co and Zoopla, through property agents in the target market, through property auctions.

Investors should make use of their knowledge of real estate and their business plans when selecting a property to invest in. Investors should only purchase the property after they have conducted a market analysis and budgeting process to ensure that the property is a valuable addition for their portfolio and within their risk appetite.

4) Analyse the Property’s Performance

Analysing the property’s performance is one of the most important aspects of real estate investing. This requires careful calculations of the property’s cash flow, internal rate of return (IRR), cap rate, and occupancy.

These metrics provide the investor with an indication of how the investment property is performing, and whether any adjustments need to be made to maximise returns.

5) Purchase More Properties Over Time

After the first investment property has been successful, the investor can move on to purchasing additional properties. However, it is important to keep in mind that all the steps should be repeated for each additional property. This is as there might be changes in the investment goals or financial situation of the investor, which in turn impacts the targeted strategies and the types of properties that are viable.

There are a few different methods investors can use to purchase additional properties.

For example, the snowball method involves the investor using the income generated from their first investment property to put towards the down payment for a second property. This allows the investor to build up their income stream and purchase additional properties within a shorter time frame.

Another method, the Buy, Rehab, Rent, Refinance, and Repeat strategy, first requires the investor to purchase their first investment property at a lower price, make improvements to it and rent it out, also known as the value-add strategy.

After the property has generated some income and part of the mortgage is paid off, the investor can refinance the property, allowing them to recycle part of the original capital from the property which can be used to finance a second investment property. This process can be repeated for subsequent properties to build up an investment portfolio.

6) Diversify the Real Estate Portfolio

Diversification is a crucial aspect of building a Real Estate Portfolio. With the volatility experienced in certain sectors of the property market, having properties concentrated within a particular market or property type holds a higher risk in the event of a downturn or other widespread economic event.

As such, investors should diversify their investment properties. This can be done across different markets, such as investing in different cities and even across different countries, or across different asset classes, such as investing in residential, commercial, and industrial properties.

Another form of diversification may also be to use different investment strategies, such as having properties across the core, core-plus, value-add, and opportunistic strategies, to reduce the risk of losses in the Real Estate Portfolio.

How is a Real Estate Portfolio’s Performance Calculated?

The performance of a real estate portfolio can be measured using a few different indicators - such as by net cash flow, cash-on-cash return, economic vacancy rate, and capital appreciation.

Net Cash Flow

The net cash flow is the amount of profits generated by all the properties in the Real Estate Portfolio. The net cash flow is calculated by deducting any expenses generated within the portfolio, such as maintenance cost, debts, and taxes, from the total income generated by the properties. This gives the investor an idea of whether the portfolio is generating a profit or a loss.

Cash-on-Cash Return

The cash-on-cash return is another metric used to measure the performance of a real estate investment. The cash-on-cash return is calculated by dividing the annual net cash flow by the initial investment to determine the returns generated by the property relative to its purchase price.

Economic Vacancy Rate

The economic vacancy rate measures the proportion of units in the property that are vacant. The economic vacancy rate is calculated by dividing the number of vacant units by the total number of units in the property, expressed as a percentage.

A vacancy rate lower than comparables in the area could be an indication that the rental rates of the property are below the average market rates, so the investor may benefit from raising the rent of the property.

Capital Appreciation

Capital appreciation refers to the increase in a property’s value over time, relative to the initial purchase price. Investors may also analyse the appreciation of other properties in the region to determine if the property is worth holding. In general, an investor should hold a property for capital appreciation if the appreciation rate is at or above the national average.

Alternatively, an investor may want to take on a Real Estate Portfolio manager, who will take charge of the portfolio performance analysis for the investor. The portfolio manager will typically make recommendations and provide guidance on how to strengthen the portfolio.

Conclusion

RealVantage allows investors to build up their Real Estate portfolios with a hassle-free and hands-off investment experience. RealVantage offers a range of fully vetted investment properties across various markets, with different asset types and investment strategies to help investors build up their Real Estate Portfolio to maximise returns while reducing risk. RealVantage also manages the assets on investors’ behalf, and provides investors with periodic property updates.

About RealVantage

RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.

The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.

Get in touch with RealVantage today to see how they can help you in your real estate investment journey.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.