Building a real estate portfolio
Mix & match
For many first-time buyers, purchasing a property is an exciting step toward increasing capital. But did you know that in most cases, you can afford more than one property and build a proper real estate portfolio? Yes, it might sound crazy, but it's more attainable than you think. You can do a lot with an average income. It's also worth it: With a portfolio, you can apply multiple investment strategies to achieve equity while preparing for retirement. You also can profit from more security if you pick the right combination. However, don't dive headfirst into things without knowing what you're getting yourself into. In this article, we'll explain the right way to build a great portfolio.
Let's get the first question out of the way: What is a portfolio? In the investment world, a portfolio is everything that belongs to your assets. That includes e. g. your ETF savings plans, stocks, securities, and properties that generate returns. For now, we're not going to look at your entire investment portfolio. We'll focus on your real estate portfolio, which is essentially the sum of all your real estate assets. There's no general rule on how many properties you need to buy to say you have a portfolio, but we generally define it as five or more units. However, the sky's the limit.
More is more?
There are some compelling reasons why buying more than one property makes sense. When you buy a property as an investment, you don't just do it because it's fun — or shouldn't, at least. You always have a goal: Maybe you want more cash to afford more trips or other things. Or maybe you want to have something to boost your retirement savings. Depending on the desired outcome, you choose an investment strategy, such as buy & hold, buy & develop or fix & flip.
You do the same thing with a real estate portfolio but have more options. You don't have to decide on one goal or strategy — you can select more than one and reduce your investment risks. Nice. If you want more on this topic, check out our podcast:
Another pleasant side effect of buying multiple properties? You often get better financing offers. It doesn't matter if you take out a 50K mortgage for one or a 200K mortgage for two apartments: the process is the same. But a higher mortgage makes the effort worthwhile. Many German banks will already give you significantly better offers for a loan of 100K euros. Sure, that also means you'd have higher mortgage rates, but you always pay off a significant chunk of that with the collected rent.
If you're thinking: "Yeah, that's great and all, but I can't even afford one property, let alone two," then we have some surprising news for you: Even with an average paycheck, let's say a net salary of 2,000 euros, you can build a portfolio. If the price is right and you're savvy and strategic, you can afford several apartments — especially if you rent them out and thus have a steady cash flow.
Another worry you can cross off your list: Owning multiple apartments doesn't have to result in exponentially more work for you. You can let a property management company take care of the daily administrative tasks, such as HOA topics, repairers, etc. If you're buying an apartment in a multi-family house owned by several homeowners, they'll have already selected a property management company. You won't have to do much anyway in this case. But you can also hire a digital or nationwide operating company to help with rent management. Of course, you'll have to shell out more money for that; it's worth it, though, if you don't want to constantly take care of things and are planning on building an extensive real estate portfolio.
Diversify or die
Now you know why a portfolio is a great idea. However, one question remains: How do you build the portfolio? The most crucial element of a perfect portfolio is diversification. If you've ever invested in your life, you've probably already heard someone preach its importance. Essentially, you shouldn't put all your eggs in one basket. Or in other words: Don't just invest in bitcoin or buy stocks from a single company or industry. If you do and things don't pan out, you'll suffer significant losses and can even lose everything you've ever invested — and that's the nightmare of every investor. You want to minimize your risk as much as possible and spread your investment as well as possible.
The same applies to your real estate portfolio: Even though real estate is generally considered a stable investment, you'll also be better off investing in more than one property. To minimize your risk potential, select a mix of properties that will give you both a high return and stability through value increase. For example, you can purchase a small apartment in Leipzig with a high yield and combine it with a high-value property in Berlin. Selecting varying-sized properties in different cities will also help you diversify your investment. With the right strategy and intelligent portfolio management, you can largely protect yourself from the risks of investing in real estate. However, evaluating a portfolio is difficult if you aren't already a real estate expert.
Planning with pros
So how the heck do you get a good portfolio? You don't have to be a rich kid to build a successful real estate portfolio. What you do need, however, is sufficient knowledge or expertise to avoid making hasty decisions and to bring balance into your portfolio. That's why we recommend one thing: Work with experts who know a lot about portfolio management and let them guide you through the process of investing in real estate. Our finance experts at Urbyo are the right people to talk to about this and can not only suggest suitable properties but also secure the best possible conditions for your loan. After a consultation and an analysis of your financial situation, they will know exactly where you stand, what you can afford, and what you want to get out of your investment. They can help you build your portfolio from scratch but will also be happy to help you evaluate your previous acquisitions and select other properties that fit into your mix.
In the long run, having a professional you can trust is crucial. After all, you should always take a critical look at your investment and see how it's performing to more quickly address or eliminate potential issues, such as inflation, rent defaults, vacancy periods, upgrades, and repairs.
In summary: Make a plan, get professional advice, and get an overview of your goals, opportunities, and risks. Asset accumulation will be a piece of cake if you have your portfolio re-evaluated and balanced every now and then.