Should You Buy a Real Estate Portfolio for Sale?

What Is a Good Gross Rent Multiplier?

You may have come across a real estate portfolio for sale and now you’re wondering ‘Is buying multiple rental properties all at once a good idea?’ It may seem like a good idea and an easy way to enter the business for a beginner real estate investor. But before purchasing a real estate investment portfolio, take time to do your research. The first step should be to examine the pros and cons of this real estate investment strategy:

The Advantages of Buying Portfolios

Risk diversification – Purchasing a real estate portfolio for sale is a strategy that investors use to mitigate risk by varying the rental property mix. Since not all rental properties perform the same way, a real estate investor might decide to buy a mix of single-family homes, condos, multi-family homes, and apartments all at once. If the investment properties are located in different housing markets, this reduces the risk even further.
Consistent cash flow – Owning one rental property can be compared to owning stock in only one company. If the stock loses value by 50%, your entire stock portfolio also goes down. Successful real estate investors realize that once in a while, a rental might stay vacant longer than expected, or might require major renovation. Owning several rental properties will ensure a consistent cash flow upfront even when some units are vacant.
Equity appreciation – Owning multiple properties allows you to build equity much faster. With the equity, you can do a cash-out refinance and use the money to purchase even more investment properties.

Related: How to Buy Multiple Rental Properties

The Risks of Buying Portfolios

Cost – Buying a real estate portfolio for sale can be very costly. If you are not prepared, you could easily get overwhelmed by the large monthly mortgage payments.
Property management issues – Managing multiple rental properties can be a very costly and time-consuming affair. It is especially tricky if the properties are spread out in different locations and if you’re buying into all of this responsibility at once as a beginner.
Financing challenges – When it comes to financing multiple rentals, lenders are usually stricter. For example, you might be required to have a higher credit score and a better debt-to-income (DTI) ratio to get favorable loan terms. Lenders are also likely to charge a higher interest rate due to the risk of borrower default.

Buying vs Building a Real Estate Portfolio

As a real estate investor, you have a choice between buying vs building a real estate portfolio. So should you buy a real estate portfolio for sale?

Though buying a real estate portfolio is a fast way of growing your business, it can end up being very expensive and time-consuming. And if you are a beginner real estate investor, you’ll find that you are all of a sudden responsible for a bunch of properties – this can be overwhelming and it’s not always the best way to start your career. Therefore, building a real estate portfolio would be the best option.

You get to handpick and analyze each investment property you add to your portfolio and decide exactly how and when you will expand. You also won’t get stuck with any poorly performing investment properties which you might find in even the best cash flowing real estate portfolio.

Building Your Own Portfolio: How to Buy Multiple Rental Properties

It’s best to build your own real estate portfolio. Here’s how!

Purchasing one property at a time and growing your own portfolio is a more advisable strategy than buying a real estate portfolio for sale. Here is a step-by-step guide on how to buy multiple rental properties that you can use to build your own real estate portfolio:

Set up a limited liability company (LLC)

Anyone planning to build a real estate portfolio should consider establishing a limited liability company (LLC). Holding rental properties in an LLC helps protect your personal assets from litigation. It also makes it easy to separate business and personal income and expenses. In addition, an LLC can significantly lower your tax liability.

Find rental investment properties for sale

You can find a wide range of investment properties for sale here on Mashvisor. Using our tools like the heatmap and the rental property finder will ensure you find exactly what you’re looking for. You’ll also be able to easily find multiple promising investment properties in just a few minutes. You can even find off-market properties in our Marketplace.

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Analyze the investment properties

Once you’ve identified some properties, conduct an investment property analysis to assess their profitability potential. Mashvisor’s investment property calculator will come in very handy for this. All you need to do is input data like the method of financing, amount of down payment, and interest rate. The calculator will then generate the following numbers:

Cash flow
Cap rate
Cash on cash return
Occupancy rate

Be sure to only buy positive cash flow investment properties. That way, it will be easier to continue buying properties and building your portfolio.

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Related: How To Do Investment Property Analysis

Consider your financing options

When it comes to investment property financing, here are some options to consider:

Conventional mortgage – This kind of financing is offered by banks and large financial institutions. Your interest rate will be determined by your financial position and credit score.
FHA mortgage – Insured by the Federal Housing Administration (FHA), this loan is ideal for investors that want to house hack. If you have a good credit score, you can put down as little as 3.5%.
203K loan – A form of FHA financing, the 203K loan is designed to allow investors to buy a fixer-upper or a property that requires major work. The loan includes the purchase price and the repair cost.
Home equity line of credit (HELOC) – If you’ve already built some equity in your primary residence, a lender might allow you to borrow cash against that equity through a HELOC. If your credit score is excellent, you could borrow up to 90% of your home’s value.

Related: How to Finance Multiple Rental Properties (Yes, It’s Possible)

Conclusion

It’s true that purchasing a real estate portfolio for sale magnifies the benefits associated with buying a single rental property. You are therefore likely to achieve financial freedom much faster. However, buying a real estate portfolio for sale is not the right strategy for everyone. For a beginner real estate investor, buying a real estate portfolio for sale would not be advisable. With all the risks involved, you could easily lose everything due to your inexperience. A better strategy would be to start with one property as you learn the tricks of building a rental property portfolio. Once you get some experience in the business, you can then begin increasing your portfolio slowly.

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