How to build a rental portfolio?

There can be many reasons to build a rental portfolio: 1) create immediate supplemental income; 2) create long term wealth trough appreciation and loan pay down; 3) pure appreciation with ‘negative cash flow’.

The general wisdom is that lower end homes typically provide more cash flow but less potential for appreciation (if any). People who invest in properties under 80-100k typically expect cash flow only with cap rate >10%. Appreciation is likely to be low if any, typically you should expect value to keep up with inflation but nothing more.

The next segment is the 100-150k properties, which still offer some good cash flow but start having some potential appreciation. Think the starter home 3-2-2 in the suburb with a decent (but not the best) school district. There will always be demand (both for sale and rent) for such affordable homes, in safe subdivision and good schools.

The next segment is the 150-250k the cash flow becomes slimmer, slightly better than breakeven but don’t expect much more unless you bought it at a significant discount. However, the potential for appreciation is much greater if in good subdivision. Such homes in the Katy area for example have increased in value by 6 to 8% year over year from 2012-15. This segment is still the ‘hot market’ with sales up and low days on market.

The higher end segment, over 250k should actually be divided in several: 250-500,500-$1m and over $1m. The return is different in those three markets but the general principle is that the cash flow will likely be neutral or negative but high potential for appreciation. The high end market is notably much more volatile, pushing higher in the good times but fairly slow and illiquid in the bad times.

Let me just share with you an example of these high end properties that I was looking into in 2011: a new 2 story home in the prestigious Lakes of Parkway subdivision was listed at 440k and was not selling (still in recession at this time), there were some incentives offered on it etc. But let’s assume it sold for 440k. It was sold in 2015 for 660k. That’s 220k or 50% appreciation in 4 years. Pretty decent, assuming the buyer put 25% down=110k, that is a return of 200% on capital invested. Any stock giving you such return lately?

The type of property that fits your need depends on your goal (income vs appreciation) and initial capital to be invested. If you have the ability to buy only 1 or 2 properties, you likely need to focus more on income properties, if you are looking into building a larger portfolio, you can spread it within various types to benefit from both income and appreciation.

There is ‘no size fit all’ when it comes to building a rental portfolio and we can help you build a tailor made real estate investment portfolio to fit both your short and long term goals, weather it is simply supplementing your income or creating a retirement plan through real estate.