Frameworks for Scaling a Portfolio

[Joshua Michael Hauman]

The basic principles to succeed in growing your portfolio are taking consistent action, systematizing the business, and growing at a manageable pace by reinvesting and leveraging equity over time. There are ways to speed this up which is what we will be discussing.

To level set:

At its core, buy and hold real estate investing is a get rich slow game. Portfolio growth must be tempered with risk at the top of mind. Better to get rich slow than not at all. I’ve done multiple deals using the core 4 acquisition frameworks I’m about to describe as well as implemented the core four operational components I introduce, helping me scale my rentals from 2 doors to 9 in 8 months.

Acquisitions

House Hacking

Everyone situation is different. If you’re able to house hack and do it properly, its a decision that kickstarts your investing journey with minimal upfront investment and low risk. This entails living in one unit of a multifamily property and renting the other units. This minimizes your housing costs, reduces risk all while generating rental income to save up for the next property. I implemented this strategy for 2 years when I purchased my first property. Effectively I paid utilities and some minor repairs as my rent for 2 years which brings me to the next in the scaling framework.

Private Capital

If you’re not independently wealthy and only use your own money to fund deals expect that to impact your growth. Using other people’s money by partnering through private money loans, syndication or by pooling funds together for deals that make sense is a game changer. I really enjoy working with investors, understanding their goals, and structuring investments that make sense for us to pursue. Leveraging others' money rather than solely relying on just my own funds continues to help me create win wins for my investors and myself to go further faster.

Hard Money Loans

Hard money is quick financing needed for purchases or renovations. Hard money is expensive and not something I recommend beginners take due to the risk. Risk is mitigated by experience. I used this to BRRRR 3 properties in the same year. Since then, I've put far more focus on using private money. I've seen hard money used most frequently in BRRRRs. Its short-term financing at high interest rates is typically used to add value and force appreciation into a deal with the goal of increasing property value fast and getting into lower interest rate long term debt quickly.

Creative Finance

With rates rising, creative finance has become even more prolific. Creative financing includes the host of strategies beyond traditional mortgages. People will tell you that you can do these with no money out of pocket. For me, I’ve always needed some money to get the deal done, however it has been less money than in traditional mortgage cases. This is just an introduction so in the interest of limiting the scope, two concepts I recommend exploring further if you feel this route is right for you. Seller finance. The seller provides direct financing by carrying a mortgage note on the property. This allows investors to purchase with little (Some will say, no money down). Terms are negotiated with the seller. The second is Subject-To Mortgages where a buyer takes over the existing mortgage already on a property when purchasing it instead of getting new financing.

That wraps up the introduction on the core 4 acquisition strategies. Next is operational activity.

Lengthen the Time Horizon

Take a 3–5-year outlook on likely cash flow. The properties I bought years ago perform better now than they did in year 1 or 2. Don’t have overly optimistic projections for year one and understand that appreciation and rents are likely to increase overtime. The delta you get between fixed rate debt and raising rents has helped my portfolio become even more profitable.

Increasing Delta

Be aggressive in your savings for downpayments by living frugally, minimizing expenses, and plowing all rental profits back into savings for the next property purchase. Most entrepreneurs start their business bootstrapped. Increasing my income and reducing my expenses for 2 years’ time proved to be a massive catalyst for growth as I had cash on hand to deploy into more projects.

Improve Operations

Standardize your processes for tasks like screening tenants, executing leases, collecting payments as you scale. Systematization is key. Automate repetitive management processes to reduce overall management time. This frees up more of your time to focus on focusing on one of the core 4 strategies I discussed above, acquiring new properties vs property management. Hire property managers to handle routine day-to-day operations like maintenance requests, tenant issues etc. Leverage out tasks to others.

Liquidity events

Most investors focus on ROI, worth consideration but even more so is ROE, return on equity. If you already have equity built up in some properties, consider recapitalizing them to free it up and go back to work for you. It can be a great way to find more cash to invest. How I frame that is that the cash is trapped. It must be freed. Refinance or do cash-out refinances on existing properties after meeting seasoning requirements to pull cash out. Then use this pulled out equity as downpayments on additional properties.

Curious to hear what strategies you have used to scale or what you plan to use so I can update my mental model. 

With Discipline,

Josh