“Own properties, you will be a mogul.” Like it or not, the old rich are some of the richest families because of real estate. One good example of this is the Royal Family of England, through the company called “The Firm”, they control $28 billion worth of real estate assets, spanning from prime real estate in London to the farmlands in Scotland.
Need more convincing? Is it ever a good idea to own multiple real estate assets for investment purposes?
Owning multiple real estates for investment will forever be a good idea. It is the way the old rich grew their wealth and how the rich today stays rich. However, for aspiring investors like us, owning multiple properties in our portfolio requires careful consideration of our intention, strategy, financials and timing.
5 reasons to consider owning multiple properties
If there is one thing I know about you, my readers, is that you want to know the benefits before any cautionary tales.
There are many benefits to owning multiple properties and the principle behind it is diversification. Whether if you are owning multiple properties or being invested in other real estate equities – such as REITs, I believe diversification is crucial for any investment portfolio to succeed over the long term. Having your investments portfolio spread across multiple property classes (Residential, Commercial, or Industrial) will almost always give better security to face the dynamic changes in the economy while gearing up to take the opportunity of a bullish market.
Below are 5 reasons why diversifying your property portfolio is good in the longer run.
- Better risk exposure in the real estate market
- Better cash liquidity and flexibility
- Taking advantage of improved market opportunities
- Ideal for scaling into a business
- Easier to finance new properties
#1 Better risk exposure in the real estate market
Property investing is already one of the lower risk investment vehicles out there in the market. However, if you look at the different property classes, you will notice different property classes brings different benefit to the table, as well as risk. Residential properties have more stable rental returns compared to commercial properties but do require regular tenant management. On the other hand, commercial properties give you better rental yield albeit tougher to find renters.
Risk management is especially important for investors to weather through some of the toughest economic crises. The COVID-19 pandemic has seen many shop lots vacated with business operators declaring bankruptcy. On the flip side, residential property landlords do see stable returns as long as tenants can be persuaded to renew their tenancy agreement.
Investing in several smaller real estate properties is a great way to diversifying risk in the real estate market. The optimal way to do this is to invest in a few different property types (condo, terrace homes), with various sizes (2-bedder, 3-bedder) and in different market segments (residential, commercial, industrial).
With a well-diversified portfolio, if one particular real estate market tanks, you can rest assured that not all your investments will suffer.
#2 Better cash liquidity and flexibility
While it is not a common topic, we, investors, can all agree that having cash on hand is really important. It is a tough pill to swallow having missed an opportunity of a lifetime because all your cash is trapped in your investment. Hence, having a well-diversified property portfolio is really good to manage such a situation.
Generally, owning multiple smaller real estate investments comes with cash flexibility and liquidity to the investor. Whenever an opportune time arises, investors with smaller investments can quickly sell one or more of their properties to fund the new interest while still benefiting from the rental income the other rental properties provide.
Contrarily, if your investment is concentrated in only 1 block of a commercial lot, it becomes really difficult to list the property for sale without disrupting any passive income. To add, you need to bear in mind that it is a lot harder to find a buyer for a $1.5 million property as compared to 3 units of $500,000 rental property.
#3 Taking advantage of improved market opportunities
If you are here reading about real estate investment, you are likely to have also considered investing in the Index Funds. Similar to the stock market, we can never know when a specific market sector goes through a bullish period. Just as diversification reduces risk exposure, it also gives you the opportunity to take advantage of bullish market conditions.
Taking for example, during this COVID-19 pandemic, we have seen the real estate hammered really badly – offices vacated, foreign expatriates returning back to their home country and businesses winding up. However, we also saw rapid growth in logistics and delivery services. Correspondingly, we saw high demands for industrial properties with some fortunate investors making upwards of 10% rental yield.
If you have had diversified into warehouses, you might have seen the rental returns from the industrial properties balancing out the losses from the other property classes.
#4 Ideal for scaling into an actual rental business
Every rental property has its own cost to management, maintenance and repairs. As with any other business out there, running a rental business also have its’ own economies of scale. With more properties in your belt, it becomes easier to negotiate with contractors for better service at a lower rate. Similarly, it now makes sense to hire a manager to manage your properties, freeing you to resolve other more important issues.
If you have only 1 or 2 rental properties, you do not have the volume to negotiate better service rates with contractors. At the same time, it is financially suicidal to have them on a retainers’ fee – inflating expenses unnecessarily. However, if you have 8 – 10 rental properties within the same location, be it different sizes or classes, it gives you negotiating power to get service contracts with contractors, with them agreeing to a lower rate for services. In some cases, it may even be possible to have them on retainers’ fee, being at your disposal and giving your properties top priority whenever maintenance or repair is required.
#5 Easier to finance new properties
From my experience, buying the first investment property will forever be the hardest. Other than having cold feet when it comes to sealing the deal, the other concern I had was in terms of financing. It took me and my wife about 2 years of savings – and I do mean bootstrapping on expenses, renting the most affordable place a young couple can afford and having living expenses at a low without jeopardizing living qualities.
However, trust me when I say that the subsequent purchases become relatively easier in terms of financing. After having our first rental property being self-sustained, it was a lot easier to prove our credibility to banks, demanding for better interest rate. On top of that, the new property is then financed by the tenants, requiring less commitment on our end as investors.
Essentially, good rental properties are self-sustaining assets if it is tenanted to good tenants at a considerable rental yield. This subsequently allows investors to use the additional funds collected from said rental properties to finance new properties. The more properties you already have in your portfolio, the easier and faster it is to scale further.
Having said that, I feel the need to caution you to be modest in your expectation and financial projections. I believe it is always important to have at least 6 months’ worth of mortgage instalment as liquid cash. In the worse situation, all your units are vacated at the same time, this at least gives you 6 months time to bring in new tenants.
A piece of advice from my mentor, a wise and successful property investor himself, “Do not rush into every opportunity you see”. There really is no benefit in over-leveraging with the bank’s money if you cannot afford the monthly mortgage. Property investment is like a house of cards, default on any 1 mortgage loan and you default on the rest – burning the entire portfolio with a single mistake.
Successful investing is about managing risk, not avoiding it.
Benjamin Graham
What should you consider when investing in multiple properties?
Now that we have covered the benefits of having to scale with multiple properties investments, it is logical to consider if I am at the right juncture of my life to scale now, considering my experience, commitment, budget and the current real estate market.
To really guide you through this, let me put it into questions for you and show you how I challenge myself.
Quesiton 1: What is my investment strategy for my portfolio?
Having been in the speculative realm for a substantial amount of time, I can only blame myself for not being aggressive when the market is weak and cautious when the market is in euphoria. Understanding my personality, I do not make good short-term speculative purchases but I do really well when it comes to long term investments – that is why I do what I do, here in the real estate market.
My taste for investment is definitely geared towards rental properties, sometimes with a knack for short term speculative flips. With that said, my ideal portfolio will be a 70-30, weighing heavily on long term rental properties and benefiting from capital gain.
Hence, ideally for my portfolio, I will be shopping for properties in a desirable location, priced a good 10% – 20% below market average. These properties will then be turned into rental properties after being rehabilitated. At the same time, rental properties do require more management and time commitment, I do not want my properties to be spread out too far across the city, or in multiple cities. That way, it becomes easier for me to manage said properties and to have a good network of contractors and service providers at my disposal.
Question 2: What is my current budget?
Take a look at your current financial status. Are your properties tenanted out and giving you a comfortable passive income? At the same time, are you able to weather through some of the toughest times unimaginable to you?
A quick litmus test to buying multiple properties I use is to look at my savings and run simulations for some of the toughest economies known to man. If your financial capital is sufficient, then it is the right time to be out and about shopping for good deals. However, if you have limited funds to do so, there is no rush in purchasing your entire portfolio now.
As general advice, real estate experts recommend buying a second property 2-3 years after the first rental property. This gives you sufficient time to save up for the new property’s down payment. Subsequently, the window between new purchases shrinks as you learn to better manage your finances.
Question 3: How much time can I commit in managing the new property?
I suppose the better way to phrase the question is, “If I am committed to scaling my real estate portfolio, how then can I make use of available resources to efficiently manage my properties?”
I think we can all agree that having more properties means more commitment and time required on your end as the landlord. If you have a full-time job, it can be a real challenge in trying to balance between a day job and managing tenants expectations. Here are some tips on how you can better manage your portfolio of properties,
- Hire a property manager
Something that I recommend if you have 15 – 20 properties, giving you good returns and justifies having a property manager.
If you portfolio focuses mainly on residential properties, perhaps this is something for you to give a serious consideration. It can be a hassle to be constantly communicating between tenants and contractors, managing appointments and getting quotations. A property manager should take over this role, ensuring your properties are well maintained at all times. - Pay your property agents a small commission to manage your properties, on your behalf
If you have a smaller portfolio and you have good property agents willing to go the extra miles for you, it might be good idea to have them manage your properties for a small fee. I believe a 5% commission from every months’ rent is a good investment into creating a self-sustaining system while giving you the freedom of time. - Have contractors or service providers on retainer fee
Managing multiple properties come with many different maintenance and repair. If you can have a company on speed dial, resolve all your problems automatically while giving you a good deal, it is worthwhile the investment.
Useful tips on managing multiple properties
While I do not yet own a big property portfolio, these tips that were shared with me by other successful investors, I share with you. Whilst it is not easy being a landlord for multiple properties, there are ways to be more effective and to reduce business costs.
Tip 1: Stay organized – use google calendar and cloud drive
Once you start managing more than a handful of properties, it becomes really easy to lose track of schedule and expense. In my previous post, where I describe the characteristics of successful landlords, it is worth noting that all successful landlords treat their rental properties like a business – with proper accounting, paperwork trails and storage systems.
Personally, I use google cloud with multiple folders, each property with its own dedicated folder and subfolders covering expenses, tenant portfolio, rental payments and other paperwork relevant to the property.
Tip 2: Go high tech – use video recording for tenant viewings
I personally believe in physical viewing, if possible, at all times. However, we have also seen extended lockdowns in Malaysia where property viewings are prohibited by the condominium management. This subsequently resulted in many rental properties being left vacant for extended periods with many viewing enquiries delayed until further notice.
If you as the landlord can provide video recordings of your property, showing the place as you would in normal physical viewing, you stand a very good chance over other landlords. Personally, I have experienced how video recordings help in getting new tenants into rental properties and can attest that it works, even more so when physical viewing is prohibited.
Tip 3: Open a Limited-Liability Partnership company
If you are committed to having a substantial portfolio of real estate investment, it is worth having a limited liability partnership (LLP) instead of having the properties under your individual name. While there are many other benefits to having an LLP for your properties, most successful investors use it to reduce their exposure to risk (unexpected lawsuits or tax issues) and also for tax planning.
Below is a quick list of why having an LLP can be good for your real estate investment portfolio,
- To insulate yourself against any lawsuits or tax issues
- Tax planning purposes – tax benefits and LLP structure
- Retirement funding
- Inheritance planning
- Property transfer ease
Final Words
Having multiple properties is the natural pathway for many property investors. There are many benefits to having a diverse property portfolio – managing risk exposure and better financial position. However, it is always best to consider your current position and timing when scaling your portfolio further.
Until then, take care.
