Tuesday, August 17, 2021
HomefreedomHow to Build A Real Estate Portfolio From Scratch


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How to Build A Real Estate Portfolio From Scratch

Investing in property can seem like it’s only for the rich.

How can you get on the property ladder when property is so expensive?

Well, I’m here to tell you it is possible. With a bit of determination and a lot of leverage anyone can invest in property. This Post Is About How I Became a Landlord.

I currently own 3 apartments on long leases and although my leases will expire in 100+ years, for the present moment and, as far as investments go, the rental return isn’t too bad.

In fact becoming a landlord was the first step on my journey to leaving the office for good, so from my point of view, investing in property is probably one of the best things you can do.

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But I’ve got to admit the term ‘landlord’ has kind of negative connotations; in times gone by landlords wielded huge power and they didn’t always put the interests of their tenants first. 

Thankfully, things have changed and although some would argue that landlords still have an unfair advantage there have been a ton of reforms and legal protections that mean tenants enjoy more security than ever before. And I’m grateful for that. Even though I own real estate I have also been a tenant myself.

So why is investing in property such a good idea. In a word… leverage.

What other investment allows you to go to the bank and leverage in up to 90% of someone else money via one of the biggest wealth creation tools in history… the humble mortgage?

Mortgages can even give you so much flexibility – you can even purchase and control the property without paying off the capital until the end of the term via an interest-only mortgage.

This means your rental investment property can give you a much higher cashflow than if you were also paying off the capital.

You can also leverage in trusted friends, family or a partner to boost the amount of mortgage you can apply for and reduce your overheads by not bearing all the costs yourself.

Leverage is what makes real estate such an attractive investment and its a term that will come to be familiar with as you research more about the real estate investment options open to you.

My Journey Into Real Estate

My journey into property investment began with a slow realisation that gradually dawned on me about the work I was doing at the time, which was renovating property.

Buying houses to renovate was not only massively time-consuming it was a huge amount of work for a return that wasn’t always guaranteed. 

I’d just finished reading Robert Kiyosaki’s Rich Dad, Poor Dad which advocates the importance of your own personal financial education, a need to take responsibility for your own finances and to have a sense of financial literacy so that you can create assets that benefit you. In fact, learning the difference between an asset and a liability was the light-bulb moment that I had in reading Rich Dad, Poor Dad.  To quote:

An asset puts money in your pocket. A liability takes money out of your pocket

Robert Kiyosaki
Rich Dad Poor Dad

In Rich Dad, Poor Dad I learnt that, for most people, their houses we’re not assets. Because they were costing them hundreds, if not thousands, each month their home was a massive liability. It’s a simple definition that means the rich continue to get richer and the wealth of society is continually weighted in favour of those who build up their portfolio of assets and those who choose to put all of their financial investments into liabilities. 

I was transfixed and I knew I had to start acquiring as many real estate assets as possible. And I really recommend the book as an excellent introduction to the mindset needed to start shifting yourself towards the approach of asset acquisition.

It was also at this time that I realised that the renovation company that I had set up with two friends was not proving to be hugely profitable and could in fact wipeout the small about of money I’d saved as a deposit.

I realised that because of the huge costs of renovations and the fact that realising profits were not guaranteed we were buying liabilities and not assets. I talk a little bit more about this on the about page of this site, but you can see some of the properties we bought and renovated below.

It was great to create some beautiful family homes but without waiting for years on end we just were not going to get the capital appreciation that the housing market has, in previous decades, been so good for.

So I made the heavy decision to pull out of the company myself and two friends had set-up renovating houses and, working with my business partner / friend, I started instead to explore the possibility of obtaining buy-to-let finance and finding an apartment or two to rent out. 

At the time I was working full-time as an admin officer for a charity with a focus in music. This meant we had to organise all of the property viewings at the weekends.

I had to arrange the mortgage finance by booking holiday off work, ensure my credit rating was up to scratch and in the best condition possible and that my partner and I had all the necessary paperwork in place to proceed with the apartment purchase once the right apartment had been found. 

Major Benefits of a Real Estate Investment Partner

Buying property is apparently one of the most stressful things you can do in life. Maybe it’s different when you are buying an asset to rent out, as opposed to living there yourself, because I always kind of enjoyed going along to view apartments and all of the negotiations that go along with purchasing a property.

My property investment partner, Sam, also made the process a hugely more positive experience. And that’s because we brought different strengths to the table.

I am a naturally organised and analytical person. I did pretty good research and was able to find out all of the necessary information in order to make an informed offer on the apartments we bought. Sam is a really interpersonal guy who has helped smooth over the transactions by keeping all parties updated and purchases progressing well. 

Because of our different strengths, the process of investing is more enjoyable. It means the work is halved and the financial requirements are halved. You might think that it’s not as beneficial as it also means profits are also halved, but if you both share the same goal to reinvest and grow your portfolio as quickly as possible then you can progress at a much greater rate than you would if you were only investing by yourself.

Having an investment partner also enables you to bounce ideas around, to double-check your decisions so that your not second-guessing yourself, and the accumulated effect of this means, that instead of only being able to buy one apartment you might be able to buy 3 or more.

If, however, you’re seeking to buy 4 or more apartments I would suggest you explore the benefits of purchasing via a limited company.

Creating A Real Estate Action Plan

Once we had made the decision to become buy-to-let property investors we decided on an investment plan of action. We wanted to rent to professional couples but we also wanted apartments that were big enough for flexibility if we needed to accommodate types of renters, i.e. single professionals and/or small families. 

We needed to choose a location that was affordable so that we could obtain the necessary mortgage finance but we also needed an area that had the maximum return on investment for the lowest purchase price. 

And that ended up being East London, UK. We would look for two-bedroom apartment blocks within close proximity of the train stations and the commute into central London. 

We spent 6-8 months researching the areas of interest, getting to know the big developments in the local areas, the nearest amenities, hospitals and schools and checking what the transport links were like. Remember it’s essential that you look through from the perspective of your potential tenants. What would make a property attractive to you will make it attractive to them? 

After fully researching the areas, getting to know the estate agents and the temperature of the real estate market in East London, we spent the next 6-8 months purchasing three two-bed apartments.

Going through this process was time-consuming, stressful but also enjoyable and I learnt a lot. The biggest lesson of all was in understanding, in real terms, the benefits of owning assets over liabilities. This is a principle that can be applied to any asset, including digital assets such as websites or online products. 

My Real Estate Portfolio

To give you a sense of the real estate investments we made and the kind of return that’s possible check out the apartments that we bought below.

Remember with real estate you’re leveraging in a huge amount of additional funds from the banks so your return on investment can be calculated by working out how much return you get on the money alone that you invested (i.e. the deposit amount). 

Just another note: although these property investments were made in London I’ve represented the figures here in dollar amounts. As the dollar currency is the standard global currency used around the world this is to give a universal idea of the kind of returns that are possible. 

Apartment 1

  • Location: London, UK
  • Rent per month: $1892.00
  • Return on investment: 10.3%

Apartment 2

  • Location: London, UK
  • Rent per month: $1763.00
  • Return on investment: 10.79%

Apartment 3

  • Location: London, UK
  • Rent per month: $1731.00
  • Return on investment: 10.1%

I don’t have any images of the 3rd apartment because we bought it with the tenant in-situ which meant we were earning a rental income from day one of ownership.

Is Real Estate For You?

I would say so but I am biased. The truth is only you can answer that question. All I can do is talk about my experience and why I think it’s a good idea. 

As you can see it’s possible to start small and grow your portfolio. The real estate portfolio I have created may be small but it costs a fraction of the money that it brings in. Even a small portfolio like this can bring in several thousand a month and only cost several hundred per month to maintain, finance costs included. 

For me, it was this positive cash-flow that was key to creating a cash producing asset. We could have easily grown the portfolio using this profit, however, there were other areas that I wished to also explore, including the peer to peer finance sector and a stocks and shares account, both of which I talk about on this site. 

For anyone not yet convinced of the benefits of real estate it’s worth running through some of the top reasons to start a real estate portfolio:

  • Leveraging finance: probably the greatest benefit of real estate investing is that it allows you to leverage a significant amount of money from the bank, via a mortgage. In what other industry would you be able to put 50k on the table and get 150k back? The introduction of mortgages was one of the huge great wealth creation tools ever produced.

    It means that you can own an asset far beyond your normal scope of affordability. And remember, when your tenants move into the property, they are not paying rent against the fractional value that you contributed (the deposit), they are paying you to rent against the whole value of the property. This means you are essentially using the bank’s money to buy an asset you wouldn’t normally be able to afford and getting the full return back to yourself.
  • Positive Monthly Cash Flow: the income streams that you get from your real estate investment properties provide you with a positive monthly cash-flow. That can accumulate and be used to purchase more real estate investment, and trust me it really doesn’t take long, or it can be spent or invested in other assets.

    Whatever your reasons for creating a real estate portfolio you will be pretty much guaranteed a monthly income, that can be insured against, to provide an income-producing asset.
  • Capital Appreciation: whilst the values of the property are not guaranteed and the prices of property can go down as well as up, on the whole properties generally appreciate in value. This is because we have a growing population in many countries and decreasing availability of housing stock.

    More people want to own property in a market that cannot satisfy that demand and, as a result, property prices go up.   
  • A Steady Investment Choice: real estate is the ‘steady-Eddie’ of investment choices. Unlike the stock market or peer to peer lending, in which your capital is most definitely at risk, real estate provides the reassurance of steady capital appreciation and positive monthly cash flow.

    Most of the major risks can be insured against and, as long as you keep your properties in an excellent condition, you will generally have happy and contented tenants.
  • Tax Benefits: although the tax and regulatory system for real estate have changed in recent years there are still a number of tax and financial advantages that investors in real estate enjoy. Tax credits might be available for low-income housing, whilst essential maintenance costs can be deducted from your tax bill.

    Additionally, interest-only mortgages are generally more freely available to real estate investors meaning they have a significant advantage in creating a positive monthly cash-flow without having to worry about the repayment of capital invested.   

Real estate isn’t all roses all of the time. It can take a significant amount of time and effort to purchase a property owing to the legal and financial paperwork that you have to get in place. Investment in real estate is not liquid.

Unlike stocks and shares, you cannot simply sell when the going gets tough and, if you don’t enjoy (or have an investment partner who does) the cut and thrust of working with estate agents, negotiating deals and liaising with lawyers than it can be difficult. 

But if you’re willing to take the risk then it might pay off, you’ll improve your confidence, learn the importance of working with people of all different backgrounds, professions and skill-sets and you might just enjoy it too.

I love real estate because it helped me take my first steps to financial freedom. Unlike many online bloggers in the personal finance world, I created my first passive income stream through physical brick and mortar investments and it’s one I highly recommend.

It might be one that requires a little bit more work than other passive investments to get up and running, but it’s also one that stands the test of time and diversifying your list of real-world and online assets is essential in creating a solid degree of financial autonomy. 

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