Building your investment portfolio

A successful portfolio is the cornerstone of a successful investment career. Building your investment portfolio is both a record of your investment history and a powerful tool for its future. It shows your past and current assets, your goals for the future, and your strategies for achieving them. In combination, these components can help you secure financing, especially if they showcase past successes and a strategy conducive to future ones, as they allow prospective lenders to gauge their potential for success on the history of, and potential for, your own.

No two portfolios are exactly alike, but they all comprise the same fundamental elements. These are: objective, numbers, asset allocation model, and property management. Knowing this basic structure will help you get your own portfolio off the ground, while gaining an understanding of how its components all work in concert will help it soar. First, let’s start with the basics.

 

Objective

Building your investment portfolio’s objective is its end goal. Are you going to be using your earnings to fund your or your child’s education? Your retirement? Is your investment portfolio going to provide your primary source of income? Once you know the answer to this question, you can identify what kinds of assets you want to hold. For example, holding multifamily or rental properties will earn you passive income, while wholesale and rehab investments will see short-term gains.

Another criterion for what kinds of assets will comprise your portfolio is the level of risk you’re able to incur without jeopardizing your objective. All real estate assets involve risk, some more than others. But as part of a well-diversified portfolio, one high-risk asset may actually lower the risk of the portfolio at large.

After you’ve identified your end goal, you’ll begin breaking it down into more tangible, quantifiable goals. These can range from your portfolio’s overall level of performance, to the performance of individual assets, to even smaller intra-asset goals like the benefit/cost ratio of specific remodeling projects or of property management services.

 

Numbers

Numbers are the D.N.A. of your real estate portfolio. They provide a truthful and transparent representation of every deal you’ve made, including each asset’s purchase price, repair and operating costs, and profits, giving potential lenders quantifiable proof of whether you’ve made good or bad deals.

When deciding what measurements to include, keep in mind that lenders will be looking for numbers that reflect the goals and overall objective of your portfolio. For example, if one of your stated goals is to reduce the operating costs of property “x” by 5% within the next year, you’ll want to include data tracking the operating costs of property “x” through time.

 

Asset Allocation Model

Your asset allocation model is the set of assets that comprise your portfolio. To determine the right asset allocation model, you’ll have to determine what combination of assets is most propitious to your objective and desired level of risk. For example, investors looking for higher returns will want to take on riskier assets, while those seeking smaller, more consistent gains will want to build their models on safer investments.

 

Property Management

While building your investment portfolio is important to know that for each asset in your portfolio, you’ll need to decide whether to serve as the property’s landlord yourself or hire a property management company. For investors with the time, resources, and knowhow, managing their own properties might be a no-brainer. For others, such as out-of-state and especially foreign investors, hiring a property management firm is simply unavoidable. Lenders will want to see how each property is being managed, and how the cost of management factors into your bottom line.

If you’re new to real estate, the process of building your investment portfolio can seem like a highly foreign concept, and even intimidating. But just as you’ll break down your portfolio’s objective into goals, breaking down the portfolio itself into its main components of objective, numbers, asset allocation model, and property management, will help you gain a better understanding of the portfolio as a whole. As Orlando’s real estate investment specialists, our team will sit down with you and answer any questions you have, determine your objective, and help you design a portfolio that puts it within reach.