A residential portfolio is a great way to spread risk by hedging multiple properties located in different areas. The idea is that even if one location and the surrounding area has a higher vacancy rate, another location might be performing better. This is an alternative to investors who are able to afford larger commercial assets yet want a safer investment with the same potential return on investment (ROI).
Another enticing aspect of residential portfolios is that you can liquidate part of the portfolio when you need the funds. This allows you to free up cash without having to obtain financing or selling a larger asset when you only need a portion of the funds.
BUYING A PORTFOLIO
Many times investors who have built portfolios and decided to sell have improved and stabilized the properties. This means that there is little to no capital improvement costs or repairs needed. Also, the properties are rented an immediately produce income upon acquisition. A portfolio that has been generating income for 2+ years can also provide strong financials for any investor wanting to finance the purchase.
Often times buyers have to pay a premium for this and will receive a return on investment similar to a traditional commercial purchase. This can lead to a difference of 1%-2% on an effective ROI as opposed to building a portfolio one property at a time.
BUILDING A PORTFOLIO
Building a good portfolio, depending on the size, can take up to several months and unlike purchasing an established portfolio, might require investing additional funds on top of the original purchase. There is also the time and cost of leasing a vacant property. However, a good broker can handle the multiple purchases and also work in pre-leasing the properties as to mitigate vacancy time.
The benefit is often times the gross amount invested in building a portfolio can generate you a greater rate of return.
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