Expanding your rental property management portfolio requires a deep sense of the market and the willingness to move when the right opportunity shows up. It also requires the right economic factors.
Growing a portfolio often means acquisitions. That’s one way to do it. You can also expand your portfolio by making your existing assets more profitable. You can pursue a 1031 exchange. You can diversify asset classes, funding, and even geography.
Take the economic temperature before you think about expanding or growing your portfolio. Outside of your own investment goals, there are some particular things that you’ll want to have in place before you make any financial moves.
Examine Market Demand and Supply
The market drives a lot of investment decisions. It drives how you price your rental property, when you renovate it, and how you market and list it.
Before embarking on any expansion plans within your investment portfolio, it is imperative to conduct a thorough market analysis of the area you intend to invest in. You need to assess the demand and supply of rental properties within your targeted market.
There’s no sense in buying a rental property in a market where 90 percent of the residents own their homes.
When you find a market where half of the population rents, that’s a good indicator that you’re buying in the right place.
These are the types of analytics you have to study before you buy. If there is high demand and low supply, it presents a good opportunity. When you decide to diversify your own portfolio and buy a few multifamily properties to add to your single-family rental homes, you can be sure that your investment properties are attractive to multiple classes of tenants and different demographics.
Know who your tenants are. Know which tenants are likely to be attracted to your property. Access the best possible data to understand the rental market and its players before you make any investment decisions.
Understanding Local Economic Indicators
If you’re thinking about expanding into a new market that you don’t yet know well, it’s important to get a sense of the local economy. In addition to the demand and supply analysis, you will want to consider local economic indicators such as unemployment rates and who the major employers are in the area. For example, if the entire market is dependent on one specific industry, that’s a huge risk. If the demand for that industry tanks, the entire area will suffer economically. That drives down home values and rental rates. It leaves tenants economically depressed and unable to pay rent.
Local economic indicators are important, and there are some national analytics that you need to tune into as well. Interest rates, for example, are making headlines all the time lately. The higher interest rates are making mortgages more expensive. That means you may have to spend more to acquire a property, but it also means that the rental market will stay strong. More and more people will be renting homes when the idea of owning a home seems financially out of reach. You can count on a large, well-qualified pool of potential tenants. That’s a good reason to expand and grow your portfolio of rental properties.
Reviewing Personal Economic Indicators
Local economy strength aside, expanding your investment property portfolio requires a significant capital expenditure, especially if you’re going to grow through acquisitions. You need to assess whether you have enough funds to make additional purchases without affecting the financial stability of your current rental property business. You can source for funding through bank loans, commercial mortgages, or private equity investors. There are hard money loans, and buying in cash is still a great way to be competitive in the market.
More and more investors are putting larger down payments into the properties they’re buying. While leverage is always a standard when it comes to investments, the expense of obtaining a loan makes a larger initial investment a better idea.
Apart from the initial investment, you’ll also have to consider the operating expenses of your rental properties. These include property taxes, insurance, property management fees, maintenance and repairs costs, and utilities. These expenses can significantly impact your profitability if not managed correctly.
Options for Expanding Your Portfolio
If the economic factors are not in your favor currently, it doesn’t mean you cannot grow your portfolio. There are other ways to do it. Consider:
- Increasing Portfolio Values
Maybe your investment goals aren’t just about acquiring new doors. Maybe you want to earn more money on the properties you already own. Your property management partner can help you do this. Rely on their recommendations on how to drive up rental values for the homes you’re currently renting. Sometimes, a simple coat of fresh paint or hard surface flooring instead of carpet can bring in extra rents.
- Consider a 1031 Exchange
A great way to grow and diversify your investment portfolio without making much of a financial investment yourself is by conducting a 1031 exchange. You can trade one investment for another through this tax-friendly transaction. You can sell one property that isn’t performing the way you’d like it to and use the proceeds to buy another property or even two properties. Sell a single-family home, for example, and buy a duplex. This grows your portfolio by giving you two income streams instead of one. And, you don’t have to pay capital gains taxes on the home you sold just yet.
There are lots of options when it comes to increasing and upgrading your existing portfolio. Good property managers will introduce strategies and suggest resources. When you’re looking for ways to expand your portfolio, make sure you’re seeking help from an expert. We’d be happy to provide some extra advice based on your unique circumstances. Please contact us.
TCS Management is a full service property management company headquartered in Philadelphia, Pennsylvania, also serving Cherry Hill, NJ, Wilmington, Delaware, Nashville, Tennessee and the surrounding areas. We focus on single-family and multifamily residential property management of homes, condos, townhomes, and apartment buildings.
