Investors who buy stocks, bonds, mutual funds, and other types of securities are familiar with the concept of an investment portfolio. The word itself comes from the Italian “portafoglia,” a case for carrying loose papers, which makes sense because securities originally were held in physical form, as stock certificates or paper bonds with coupons attached. But the investment portfolio concept has always been an abstraction representing a collection of financial assets purchased to meet specific investment objectives. For real estate investors, it’s a way to refer to the collection of properties and real estate derivatives they own, and the same basic portfolio management principles apply. To learn more, check out our guide on how to grow your real estate investment portfolio. 

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3 Steps for How to Grow Your Real Estate Investment Portfolio

Portfolio Diversification

Diversification is a key portfolio management principle, often summed up as not putting all of one’s eggs in the same basket. Investing in securities that perform differently under the same circumstances mitigates the risk of across-the-board losses when conditions change for the worse for a particular company, industry, or the economy as a whole.

The same is true for real estate portfolios. Real estate investments can be diversified by type (e.g., single family or multifamily residential rental properties, vacation rentals, commercial retail or industrial properties, raw land, etc.). They can also be diversified by investment objectives (high current rental income, price appreciation over time, or a combination of income and growth) or by investment strategy (fix and flip, hold and manage long-term, hold short-term and sell at a profit, etc.), or by property class (Class A, B, or C). And then there is geographic diversification, which involves owning properties in different areas that are unlikely to be affected by the same local challenges, such as the loss of a major employer or an increase in local property taxes. 

Purchasing shares in real estate investment trusts (REITs) or exchange-traded funds (ETFs) that invest in real estate, or becoming a limited partner in a real estate syndication, provides another kind of diversification. They put someone else in the driver’s seat regarding decision-making, allowing you to concentrate more of your attention and resources on properties that require your active involvement.

Crunch the Numbers

Acquiring properties for a real estate portfolio is one thing. Growing a portfolio in terms of its ability to meet your investment objectives and meet or exceed your income and growth expectations is an entirely different matter. 

First, know what return on your investment you are seeking and whether the properties you already own are performing well enough to hit that mark. If they’re not, what could or should you do to improve the situation? Perhaps there are improvements you could make that would support increasing the rent to generate more income and increase the value of an underperforming property. Or maybe you need to take a close look at its operating expenses and take steps to reduce them, for an increase in net revenue from rents.

Understanding how the numbers are working for or against you can help you identify when it may be time to sell a property and take a profit rather than continue holding it. It can also suggest refinancing opportunities that would work to your advantage.

Pursue Exponential Growth

Professional poker players live by the motto: “Lose arithmetically and win geometrically.” That means limiting exposure to risk when the chance of loss is higher and upping the ante when there is an opportunity for greater gains. In the world of real estate investing, that means plowing profits back into your portfolio, by using rental income and capital gains to reinvest in acquiring additional properties or upgrading current holdings to increase their income potential, for example.

One good way to do this is through a 1031 exchange, which involves selling one property and using the profits from the sale to purchase another one. Ideally, that would be a property of greater value or with the potential for a higher return than the property that was sold. Similarly, refinancing one or more properties can not only lower what you’re paying in debt service but also allow you to pull out some cash and use it to make improvements on properties you currently own or to acquire additional properties.

Growing a real estate portfolio requires a combination of initiative, prioritizing reinvestment over spending to achieve a desired lifestyle, and expert knowledge. The first two of these are a matter of personal temperament and commitment, which must come from within. Expert knowledge can be gained through experience or through consultation with real estate professionals and investors whose experience exceeds your own. If you’re willing to do the work, scaling your real estate investments should be within your reach.

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