Real estate has long been regarded as one of the most profitable ways to generate passive income, especially if you are involved in rental properties—both residential real estate and commercial real estate. However, while collecting the rent checks from your tenants is certainly passive, building a real estate portfolio is decidedly not.

How to Build a Real Estate Portfolio

  • Research Real Estate Investment Strategies
  • Invest in Property
  • Structure Investment to Maximize Tax Savings
  • Grow Your Portfolio

Real estate investors with a portfolio of properties can see that these investments generate thousands (sometimes even millions) of dollars every month.

What is a Real Estate Portfolio?

So, what is a real estate portfolio, anyway? A real estate portfolio is a collection of properties held and managed to achieve a financial goal. A real estate portfolio can be held by an individual or corporation. It can also be structured as a REIT (Real Estate Investment Trust), which is a way for limited partners to pool their money together and invest it in a real estate portfolio managed by a third party (sort of like a mutual fund). As you can see, a real estate portfolio is similar to any kind of other investment portfolio, with asset classes held and managed with the goal of seeing a return.

Real Estate Flipping vs Investing

Investing in real estate generally falls into two categories: flipping and renting. A real estate investor who flips is generally buying properties at the lowest price they can get, perhaps putting a little work into them, and then putting them back on the market to sell at a higher price. You might even know a few people who do this by flipping homes—they buy a fixer upper in need of repair, hire a contractor to do the work or do it themselves, and then put it back on the market. In some cases, these types of investors will buy distressed properties, such as ones that have gone through a foreclosure and are now bank-owned. Alternatively, they might have acquired the property through a short sale or an unpaid tax lien. And then there are investors who just buy regular houses on the market; something with a little bit of charm that could be brought back to life with new fixtures and flooring.

A real estate investor who gets into rentals is different. They are not looking to purchase properties and put them back on the market to benefit from the profits. Rather, they are looking to create long term wealth by accumulating properties to rent out. Investors who rent out single family homes are said to be engaged in residential real estate, even if these properties contain up to four units (like a duplex, triplex, or quadplex). If there are more units than that (even if the nature of the property itself is residential—like an apartment community or condo building), is said to be commercial property. And of course, if a property is geared toward commercial use (like a mall or strip mall, hotel, or restaurant) is commercial real estate. Generally speaking, commercial real estate is split into four categories: office space, industrial, multi-family rentals, and retail.

Real Estate Offers Promising Investment Potential

The largest real estate portfolios in the world are more often than not owned by behemoth sized corporations, like China’s Evegrande (#1), America’s Marriott International (#9) and MGM Growth Properties (#16). Sometimes an institutional investor, like Blackrock, will diversify their overall investment portfolio of stocks, commodities, and other securities with real estate too.

Then of course, there are private individuals who are large landholders and/or have sizable real estate portfolios, such as the Queen of England (6.6 billion acres) and King Abdullah of Jordan (547 million acres). Other noteworthily famous real estate moguls include investor-turned-president Donald Trump and (surprise) Bill Gates, who owns more American farmland than anyone else.

But you don’t have to be the Queen of England or the CEO of Microsoft in order to have a real estate portfolio. There are hundreds of thousands of everyday, normal people who own rental properties, and even just one property can be said to be a real estate portfolio. In fact, of the 48.2 million rental units throughout the United States, individual investors owned 41.2 percent of them, which translates to roughly 19.9 million units. Interestingly, these units are found on more than 20 million properties, with an overwhelming 71.6 percent owned by individual investors. This just goes to show you the vast majority of the properties themselves are owned by individuals, and that a significant portion are probably single family homes.

That’s good news for aspiring investors in real estate. There are plenty of people out there who are building a real estate portfolio, and it’s very much within the reach of the average person.

How Does Real Estate Compare to the Stock Market?

You may be wondering how the real estate industry compares to other investment strategies, like a portfolio drawn from securities on the stock market. One of the key differences lies in the fact that a property portfolio is actually composed of tangible land, in addition to the rental income it produces. Many investors with real estate assets find great comfort in this, as land and improvements thereon are an extremely grounded asset type (no pun intended).

Of course, a stock portfolio manager will tell you that stocks are just as stable as real estate investing, and in fact (by many calculations) outperform real estate by seven percent year-after-year, after factoring in inflation. By contrast, real estate does typically outpace inflation, but not by much.

That said, a real estate investment portfolio enjoys several advantages over stocks, even REIT investments. This is because real estate in the form of rental property generates cash flow, and this cash flow is likely to be much higher in terms of comparative value to the asset itself.

Real estate as an investment also enjoys more tax advantages than investing in stocks does, especially because the IRS, the SEC, and other governing agencies place many limits and limitations on stock trading via regulatory considerations and the tax code. Additionally, real estate as an investment has many tax saving considerations built into the asset class, such as depreciation.

Lastly, investing in real estate can be more easily accomplished with leverage (that is, using debt to finance investing activity), which is much harder to do when it comes to stocks—especially for retail investors. One reason, of course, is that trading or investing with leverage in the stock market (called trading on margin) comes with significantly greater amounts of risk than investing in land and improvements on the land.

How to Build a Real Estate Portfolio

1. Research Real Estate Investment Strategies

Not all passive investing income strategies are the same. Earlier, we mentioned two different types of rentals: residential and commercial. But there are actually many more types of real estate investments than that, including residential, commercial, industrial, raw land, and special use—just to name a few.
How To Build A Real Estate Portfolio Scaled

Residential real estate is (as mentioned) single family housing, although the houses themselves can be up to four units. Industrial real estate includes things like factories, warehouses, and power plants—basically anything used for manufacturing, distributing, or researching the development of products. Raw land includes undeveloped property and farmland for agricultural use, like ranches, fields, and orchards. Raw land could also include land used for natural resources, like timber, oil, or precious metals. Special use land includes things like public parks, government buildings, educational facilities, and religious structures.

Commercial real estate is split into multiple categories (and actually industrial, raw land, and special use really all fall under its umbrella). Commercial real estate can also include office space, hospitality (like hotels), office space, retail, and mixed-use properties. Mixed use properties have become increasingly popular lately. For instance, in many areas, especially urban areas, you will see high rises that are a combination of condo buildings, shopping malls, office spaces, and parking lots.

As you can imagine, each type of real estate will require a very different strategy. The considerations you need to think about for farmland are not the same as those you need to think about for multifamily housing. Books, articles, and podcasts are a great place to start your research, as is joining Infinity Investing. Our free membership gets you access to our weekly Real Estate 101 Beginning Investing Room, where our experts teach you how to maximize cash flow generated through real estate.

2. Invest in Property

The next step of course is to invest in property. This does not necessarily mean using your own money or obtaining a typical conventional mortgage (although it might at first). Sometimes a real estate investor will seek a loan from a private lender or gather funds from other investors. You can take this OPM as it’s called (other people’s money) and put it to work. In some instances, you may be able to obtain seller financing, where you provide a down payment and lease the building you purchase from the owner until the debt is paid off, either on an amortized schedule or as a lump-sum balloon payment. There is no one rule that you have to follow for getting started or funding deals. You just need to be creative and think outside of the box.

Don’t write off an opportunity just because you have preconceived notions of what’s possible. For example, many beginning investors ignore the idea of owning a small apartment building, thinking that they have to build their way up to that point first with several single family homes. But consider this: paying a property manager or management company to take care of multiple units in one place is probably a lot easier and less expensive than paying one to take care numerous buildings in a diverse range of locations.

3. Structure Investment to Maximize Tax Savings

Remember that it’s not about how much you make; it’s about how much money you keep.

Earlier in the article, we mentioned high-profile individuals with sizable real estate portfolios (Queen Elizabeth, Bill Gates, Donald Trump). But did you know that when it comes to real estate, these individuals are not actually holding their portfolios as individuals? That’s because they would face punitive income tax rates. Rather, they structure their holdings as a corporation and (at least in the United States) take advantage of tax laws like depreciation, which allow them to lower their tax burden.

Don’t worry, you don’t need to figure all this stuff out yourself—that’s what the professionals are for. Working with a business tax advisor and/or lawyer who understands real estate law in your state can go a long way toward structuring your real estate portfolio to avoid paying more taxes than you need to.

4. Grow Your Portfolio

Finally, once you have a property or two under your belt, it’s time to grow your portfolio.

One of the best ways to grow your portfolio is by outsourcing the time-consuming tasks to professionals (when possible). For instance, if you have a handful of single family homes, hiring a property manager or property management company to take care of them will allow you to search for new real estate deals—something you can’t do if you’re running to the hardware store for maintenance all the time.

Just think though, if you ever do scale significantly, you won’t be able to run from building to building installing new carpet. Assembling your team of professionals now will allow you to kickstart growth so you can pursue new opportunities.

How Much Real Estate Should Be in My Portfolio?

As much as you’d like! However, some experts suggest only putting 25-40 percent of your net worth into real estate, just to keep things diversified. The real estate market does go down sometimes. And if you’re hedged against those losses with other types of assets, such as stocks, gold, and perhaps business ownership, you’ll be in a better boat to weather the storm.

Those other types of assets are easy to start building and manage as well. For instance, when it comes to stocks, the best trading apps allow you to invest as much as you want, whenever you want.

Real Estate Offers Many Benefits for an Investment Portfolio

Aside from the stock market, real estate is one of the most popular ways to invest money and generate income. Not only does the value of the real estate asset itself grow in value, but the opportunities to turn the investment into a source of passive income is promising as well.

If you’re looking for more ways to invest in your financial future, check out Infinity Investing: How the Rich Get Richer and How You Can Do the Same by Toby Mathis. Download the first chapter today to start your passive income investing journey using real estate, stocks, and more.

Bonus Video

Infinity Investing Workshop

In this FREE workshop you’ll discover how the top 1% use little-known “compounders” to grow & protect their reserves. This plan isn’t some get-rich-quick vision board. It’s an actionable guide, simplifying the very same processes used by many of the most successful people.

Your path to financial freedom starts here.