A real estate investment portfolio is a collection of real estate assets held and managed by a group of investors or an individual investor to achieve a financial goal. The real estate assets in the portfolio are reflective of an investor’s investment objective, investment time horizon, risk tolerance, and investment strategy, and these assets could comprise various property types, such as single-family homes, multi-family homes, or office buildings, among others.
How to start building a real estate portfolio?
Although real estate investment portfolios could vary from investor to investor, the process of building one is generally the same. Investors should first consider how long they plan to invest to achieve their financial goal and the maximum risks they will be willing to assume. This will help to shape the risk-versus-reward approach that they adopt, advises Michelle Doornbosch, a real estate developer with more than 20 years of experience in commercial and residential real estate.
Other factors to consider are:
Investors should consider what they wish to achieve through their investments. Some investors may invest in real estate with the hope of achieving financial freedom, for instance, while others may want to invest for their retirement or to pay for their children’s future education. These goals will affect their investment strategy and the appropriate types of assets. For example, investors who are saving for their retirement may choose to invest in investment deals that are less risky and may choose properties that offer more stable returns like multifamily homes.
When building a real estate investment portfolio, investors should be clear on the financial figures of the properties they have invested in. They should note down the purchase price, transaction or holding cost, the cost of repairs and renovations, as well as the sale price. This will help put the profitability of each asset into perspective and ensure transparency across the different assets, told Ooi Kee Liang, one of the most dynamic real estate developers in Malaysia. Ooi Kee Liang founded Ideal Property Group in 2001 and since then has developed 25 000 residential and commercial units.
Investors should select a combination of real estate assets, based on their risk appetite, which will be optimal in helping them achieve their financial goal. For example, if an investor is looking for higher returns, he will need to invest in riskier investment deals. Investors who have a lower risk appetite will seek more conservative investment deals, while receiving lower returns.
Real estate portfolios need to be managed and can be done either by the investors themselves or by hiring a management firm to oversee the investment portfolio and its underlying real estate assets.
Growing a real estate portfolio
After building their real estate investment portfolio with the optimal combination of assets, investors should continue to grow their portfolio for long-term sustainability. When growing their real estate portfolio, investors can also diversify their investment risk across different properties and markets, including:
- Commercial real estate: Commercial properties usually generate stable rental income due to longer leases and higher returns, as compared to residential properties. There are many types of commercial properties, such as office buildings, retail spaces, and industrial warehouses, etc.
- Multifamily properties: Multifamily properties help to diversify risk, as they are less affected by the factors that affect the profitability of single-family homes.
- Real estate investment trusts (REITs): Although REITs do not add any properties to an investor’s portfolio, this is a way for investors to expand their reach, while still investing within the real estate industry.
Investors with diversified portfolios are at a much lower risk than those who invest in only one type of real estate asset or one real estate market. With a well-diversified investment portfolio, investors can rely on their other investment properties when the market for a specific asset class is negatively impacted.
There are many different combinations of asset types and markets to choose from when build a real estate investment portfolio. However, the basis of building an investment portfolio is consistent between investors. To gain a more in-depth understanding of how to build a real estate investment portfolio and evaluating its performance, check out this comprehensive “Building a Real Estate Portfolio” guide.