Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

The Biggest Mistakes To Avoid When Building A Real Estate Portfolio

Written by Than Merrill

Key Takeaways

  • Building a real estate portfolio has as much to do with what you do right as what you do wrong.
  • Making mistakes is going to happen, but those that can mitigate them will find the odds ever in their favor.
  • If you can effectively limit the mistakes you make when growing your own portfolio, it stands to reason that success will be easier to realize.

Is building a real estate portfolio somewhere in your near future? Better yet, have you taken the appropriate steps to make sure your real estate portfolio is on solid ground and in a position to make you money?

Wherever you currently stand on the idea of building a real estate portfolio, it is widely regarded as a great decision for anyone looking to achieve financial freedom. Doing so, however, will be easier said than done. There are a number of things you must do in order to see to it that your portfolio works in your favor. Perhaps even more importantly, there are a number of things you must avoid doing if you ever hope to realize a higher level of success; namely, making mistakes. If you want to build a real estate portfolio that contributes to your bottom line (instead of detracting from it), you must avoid making costly mistakes.

Fortunately, today’s investors have the benefit of learning from their predecessors. You no longer have to make a mistake and learn from it. As a result, I have compiled a list of four costly mistakes investors need to avoid when building a real estate portfolio.

Building A Real Estate Portfolio: Costly Mistakes To Avoid

Rental property portfolio

1. Neglecting Real Estate Portfolio Diversification

We are all well aware of the power of a great investment portfolio. With the right vehicles in your corner, financial freedom isn’t simply a reality, it’s a possibility. It’s worth noting, however, that it’s not enough to simply build a real estate portfolio without a sound real estate investment strategy in mind; you have to go into it with a plan.

For what it’s worth, there is one, single strategy that is universally accepted by just about every investor that has realized some degree of success with their own portfolios: diversification. If for nothing else, a great portfolio is a diversified portfolio. Nothing else, as far as I am concerned, can simultaneously mitigate risk and increase your odds of success in one fell swoop quite like the right combination of assets.

A unique congruence of performing assets can produce amazing results, not the least of which can pad your coffers quite generously. That said, it’s in your best interest to diversify the assets you hold. Instead of owning a portfolio that consists solely of rental properties, try expanding your horizons. Refraining from putting all of your eggs in one basket is the safest move you can make.

I recommend taking a look at real estate investment trusts (REITs). Not to be confused with mutual funds, REITs provide investors with additional streams of income, diversification and long-term capital appreciation. They are essentially another way to invest in real estate, but without having to physically acquire a property. That way, you can simultaneously take advantage of a housing market that is firing on all cylinders while diversifying your own holdings.

2. Ignoring Due Diligence

What is a good investor, if not for someone that can place the odds of success in their favor? What better way to do so than to reduce your exposure to risk? If for nothing else, you could argue that the less risk you open yourself up to, the greater your chances are of walking away from a deal happy are. The same concept can be applied to an entire portfolio of investments, but it’s up to each individual investor to realize as much.

Thanks to diversification, savvy investors can reduce their exposure to risk and effectively give themselves the best chance of building a lucrative portfolio. However, diversification is rendered moot in the face of ignorance; for it’s not enough to diversify your assets for the sake of diversifying. Every attempt to diversify your holdings should be met with due diligence. At the very least, diversification won’t mean anything if you don’t compliment it with due diligence.

That said, neglecting due diligence is perhaps one of the worst possible things you can do when building a real estate portfolio. Even the slightest failure to take the appropriate steps could lead to disaster. Your ignorance is magnified by the amount of holdings in a respective portfolio, so you need to be extra careful. Again, mind due diligence and and address each step with the attention it deserves. Above all else, educate yourself on what you are getting into.

One thing is for certain: nobody has ever built a great portfolio without minding due diligence. I implore you to take as much time as you need to make sure everything is in order. Do you know absolutely everything there is to know about the assets in your portfolio? Do you have any contingencies in the event something unexpected happens? Leave no stone unturned.

3. Doing All Of The Work Yourself

If you find yourself with a portfolio full of cash-flowing rental properties, it’s safe to assume you are ahead of the curve. A great deal of Americans don’t have anything saved up for retirement, let alone enough to get them through their golden years comfortably. That said, few things will take you further in retirement than a properly built real estate investment portfolio.

It’s worth noting, however, that there is a direct correlation between the amount of rental properties you acquire and the amount of work that will be expected of you. While more rental properties can add to your bottom line, they won’t do so without a significant caveat: they will require more time on your behalf. That is, unless you hire a property manager.

As far as I am concerned, building a real estate portfolio is one of the best ways to achieve financial freedom, but today’s best portfolios are simply too much for one person to manage. It’s not fair to expect a single person to manage 10 (or even 20) rental properties on their own, is it? Growing portfolios will inevitably get too big for one person to manage alone — it’s as simple as that.

It’s entirely possible to manage one rental property on your own (even two or three), but anything beyond that begins to be counterproductive. The passive income you have worked so hard to establish is rendered moot if you are stuck making house calls every weekend. That’s why I can’t stress the importance of enlisting help enough. Instead of managing your entire portfolio, I implore you to hire a property management company. With the right property manager on your side, you can increase the amount of rental properties you own without investing more time yourself.

While their services will eat into your bottomline, property managers are also integral for increasing the amount of properties your portfolio can hold. With a good property manager at your side, building a real estate portfolio becomes a reality. Conversely, neglecting to hire a property manager will cap the amount of properties you can acquire, effectively limiting your income potential.

4. Underestimating Costs

As I have already said several times, few paths to financial freedom are more promising than building a real estate portfolio. It’s entirely possible to make enough money to retire, passively nonetheless. However, doing so is not cheap. In building a real estate portfolio, there are a lot of upfront costs. Of course, there is the acquisition of the property, but you need to account for everything. In addition to buying the property, you need to recognize the bevy of other costs that have become synonymous with your typical real estate portfolio:

  • Property manager fees
  • Homeowners association fees
  • Routine Maintenance Costs
  • Vacancies
  • Insurance
  • Utilities

Owning a rental property is expensive — worthwhile, but expensive. And if one rental property can coincide with a number of costs, think of what you can expect from an entire portfolio.

There is no doubt about it: building a real estate portfolio full of rental properties will make you responsible for a lot of costs, each of which must be accounted for. Failure to budget accordingly could be disastrous.

It’s In The Details

Building a real estate portfolio can be one of the best decisions you ever make. Provided you mind due diligence and avoid making critical mistakes, there is no reason the right portfolio couldn’t help you realize a level of success you never even knew existed. That said, building a real estate portfolio isn’t easy, and nobody is going to do it for you. It’s one thing to say you won’t make any mistakes, and it’s another to actually avoid making any mistakes. Nevertheless, it stands to reason that those who make fewer mistakes will find more success.

Have you ever wanted to build a real estate investment portfolio? Have you learned any valuable lessons along the way? Feel free to share what you have learned on your own journeys in the comments below, and perhaps make the path for others to come a little easier.