How to Build a Diversified Real Estate Investing Portfolio



Some people stumble into real estate investing and then build a career around it. As these investors gain experience, many diversify their portfolios using multiple strategies. Many stories begin with college students that are astute enough to realize they can hack their college living arrangements by buying a condo or house that pays most or all of their living expenses during college years.

As the story goes, a young woman buys a three bedroom home and rents out two of the rooms to other students. Instead of a dorm, she not only gets the home’s master bedroom, the roommate rent covers her mortgage, living expenses, and puts $150 of spending cash in her pocket each month. A $150 might not be much to many of us but is huge for college students. She’s hooked on real estate. She decides to make a career investing in real estate with her first home becoming her first rental after her college years.

  1. A house hack, as in the story above this is often the first step in building a diversified real estate portfolio. Or it begins with an inherited house or by renting out a room. What it does is open the eyes of people to the many real estate investing possibilities.
  2. REITs (real estate investment trusts) are more suited to investors not wanting to be involved with property management. These are shares of properties only owned on paper. You don’t take title to individual properties. REIT investing can be as simple as buying a stock on a public stock exchange or as complicated as buying into a nonpublic fund. Either way, you need to do your homework. You can invest in REITs that own any type of real estate ranging from single-family homes to office buildings to hotels to apartment buildings. A brokerage account that can be opened in 15 minutes or less. Some REITs require a minimum investment.
  3. Tax liens have potentially huge returns with minimal investment but there can be significant risks. You must learn individual investing processes because processes vary from state to state and county to county. Typically, you pay back taxes that earn you a high interest rate that the property owner must pay to have the lien removed. Interest rates range between 12% and 36%. If the taxes and interest remain unpaid, the investor potentially takes ownership of the property through foreclosure but regulations for this vary greatly from state to state.
  4. Landlording for little or nothing down. Crowdfunding is increasing in popularity as a funding source for real estate investors. You’ll find funds specializing in a variety of strategies. This includes you being the landlord. Crowdfund investors either take on debt that must be repaid or own equity in the property. If you use debt financing, you’ll be the full owner once the debt is repaid. If you use equity financing, the crowdfund investors expect to receive monthly or quarterly distributions. In either case, the crowdfund must be paid for taking on a significant amount of risk and paying a fee to the platform.
  5. Flipping and rehabbing. This is one of the most popular with too many different strategies to list here. Crowdfunding is becoming popular and buying foreclosures has a long history with these investors. Many reinvest profits to build a pipeline of properties with some in the demolition stage, in remodeling, and being marketed for sale. This develops into a constant stream of high profits.
  6. Sandwich lease options are another low cost investing strategy. Investors control the property without taking ownership. They take control for the cost of an option fee that gives them exclusive right to control and purchase the property during a specific period of time. Investors then find an end buyer who repays the investor’s option fee plus a profit. Investors continue to profit by collecting a rent higher than they pay out during the option period. Finally, the investor collects a big profit when the end buyer completes the purchase before the end of the option period.
  7. Seller financing using other people’s money provides a passive income stream after some initial upfront work. The original purchase is made using other people’s money that often comes from retirement accounts such as self-directed IRAs or 401ks. The home is typically seller financed with a 20-year mortgage. Repayment comes from a down payment and mortgage interest rates that can range from 8% to 14%. Lead investors pocket the entire down payment plus receive 2% or 3% of the interest as passive income for the next 20 years.

Any of these and other investment strategies are used to build a diversified real estate portfolio. It’s important to fully understand the details and variations of each one before moving from one to another. With time and accumulated savvy, you’ll have multiple passive income streams and a toolbox that works in all types of real estate markets.

What are your ideas about building a diversified real estate portfolio? Please comment below.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

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