Creating a diversified rental portfolio takes time and knowledge to know what investments are best for you. Greg Kilper elaborates how your portfolio largely depends on your needs in life and what you want to get out of your portfolio, both for short term and long term.
Male: Welcome to the We Buy Ugly Houses Show, where real investors share real investing stories and lessons from the trenches, where our team buys thousands of investment properties each year. Now, let’s meet today’s host.
Greg: Hi, everybody, I’m Greg Kilper. I’ll be your host for the We Buy Ugly Houses Show. I’m a Development Agent out of St. Louis, Missouri. And we’re going to talk today about diversifying your rental portfolio.
So diversification in a rental portfolio is something that most people probably don’t prepare for when they’re first getting into the rental business. I started five years ago and I started with a gentleman who was a little bit older than me. He was a bank savvy guy. He actually worked for a bank as an executive. And he had some great understanding and knowledge of the industry. We leveraged that to go out and get loans to purchase properties.
So we started buying and buying, and filling them in. And we found out that it’s pretty capital intense at the time to get that going. But we got to a point where we had about 13 rentals. And we just saw that, really, I would say that in my opinion, it’s a five to 10-year commitment before you really start seeing that money turning around and coming back to you and get your systems ironed out, at least five years.
So once we kind of realized that, because we were both new to the rental game, I mean, I had some personal but not as a business, we decided that it wasn’t really going to fit his time frame so we started selling some of those rentals off. Wonderful guy, great partner, and we have a great relationship right now. But we started winding that down. And that was probably three years ago when we started winding down.
In the meantime, I was flipping houses, rehabbing houses with HomeVestors. I liked the returns on that side of the business, but I wanted this fixed income portion of my business. So felt like I had some stability that I was going to start building up because I’ve been doing this for about nine years now.
So, about three years ago I met a gentleman. He was getting his PhD and he wound up getting into real estate. I saw what he was doing because I was selling him properties. And I started seeing he was working through these things, and some in creative ways whenever he got into him, but most of him, he was just holding regular and making great returns on. And I said, “Wow! I want to start doing that.”
So I started buying rentals with him. And we went out and we added a lot of rentals quick. And one thing that I was probably naïve to three years ago was that the rentals they’re not really a fixed income. They can be. It’s not a bond, it is a business. So when you get into it, you really got to have, especially when you start ramping up, 20-30 and above, you really got to have systems and you got to have pieces in place.
So what I found out was that I could take the nice rentals that my previous business partner I had, and I could roll those over into this new portfolio of higher cash flowing properties and get a nice mix. So I think it’s important most people want to get into the business, they’re chasing those returns and they go into the higher cash flow areas. But sometimes, you have more management intensity. And a lot of times you could have a higher police presence.
As long as you have the systems in place to deal with that, you can make some great cash flow off the high cash flow properties. But I think once you’re in it for a little while, you start to realize if you go out and get some of that and buy these nicer, higher price point properties, you’ll actually see more appreciation. You’ll see a pretty good amount of cash flow with the debt service. Your cash on cash, which is a number I used to calculate how my investment is performing, is still really good. Because a lot of times, in my market of St. Louis, Missouri, I could find a nice property, put 20% down, and then I project, over the course of the year, my cash on cash can still be really good on those even compared to the high cash flow properties, which are more management intense.
So my point is here, the rental portfolios they can be diversified. You should have some high cash flow properties to cover that debt service, cover the maintenance, taxes, insurance, all that. But you also should consider buying some higher price point properties as well, which will have that additional leg of income in the form of appreciation, and which actually perform pretty well also.
So, that’s where I’m at right now. If you have any questions about rental properties, please feel free to email anytime. I’m a Development Agent with HomeVestors and thank you for watching.
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