Many investors who have positive experiences with their first rental properties will naturally consider expanding their portfolio. For those fortunate enough to realize positive income, and enjoy the tax advantages, and other benefits that can potentially come with real estate investments, it easy to ask yourself: "How many rental properties can I have?"
While there's technically no "limit" to the amount of investment real estate you can own, there are several important things you'll want to consider before making your next real estate purchase.
Investment Goals
Before purchasing any investment, it's essential to think about what you're ultimately trying to achieve. For example, if you're looking to maximize your income and are willing to accept some additional risk and don’t mind the extra work, acquiring a few more properties may be a good idea.
However, if you're planning to retire soon and want to protect and maintain the portfolio you've already built, then you may want to consider repositioning your appreciated equity into assets that will provide more passive income so you can wind down your stress level and free-up time to enjoy your golden years.
Time Commitment
Having your first rental properties perform well can be both a blessing and a curse. If the investments feel like “easy money” it is easy to fall into a trap of thinking that your future investments will also perform as well or better. Direct property investments often require a significant amount of hands-on work. This includes the effort involved in buying, managing, and eventually selling each piece of property you own. Less obvious is the need to budget extra time and money to deal with unanticipated challenges that may occur such as loss of tenants, unexpected repairs, higher than expected expenses, legal issues, etc.
Before expanding your real estate portfolio, it's important to ensure you have enough time to devote to the upkeep and management functions your additional properties will require. Of course, you could hire a management company to do much of that heavy lifting for you, but that comes with a cost, and you'll likely find that there are still other tasks that only you can do.
Capital Resources
While real estate investments can be a great source of passive income, they also require ongoing capital investments to make property enhancements and maintenance repairs. As your property portfolio grows, so do your financial responsibilities. You will likely spend money contracting with consultants who will help you acquire new tenants, update contracts and address insurance and tax requirements.
You will want to ensure you have set aside adequate capital to cover these expenses and owning additional properties will require more capital reserves.
Since the last great recession, many lenders have instituted limitations on the number of mortgages they will permit individual investors to hold to no more than four including the mortgage on their primary residence. Smaller community banks and private money lenders may allow investors to finance additional properties but will likely charge higher lending costs and have stricter qualifying requirements that may prove challenging to meet.
Other creative financing strategies including Freddie Mac Investment Property Mortgages, self-directed IRAs, 401(k) for small business owners, and home equity lines among others may be worth exploring.
Diversification Strategy
Owning multiple pieces of investment real estate can be an excellent way to diversify your portfolio. However, if you own the same types of properties in similar locations, you're not getting as much diversification as you may think.
In this case, it may be beneficial to explore selling less desirable properties in your portfolio and redeploying equity in properties structured as a Delaware Statutory Trust (DST). The DST investment structure can offer you the ability to own a fractional interest in a portfolio of institutional quality real estate that holds different property types in various locations throughout the country.
DSTs are an increasingly popular passive investment structure among investors who own rental properties but have tired of the work required to manage their properties. Minimum investments can range down to $50,000 thereby creating added diversification options.
Tax Concerns
As you are aware, when you sell an investment property that has appreciated in value, you'll typically owe taxes on capital gains and depreciation recapture. However, tax deferral strategies using the 1031 exchange, Opportunity Zone, Deferred Sales Trust, or cash out refinancing may provide a means to lessen the potential tax consequences.
Final Thoughts
If you're thinking about stepping away from direct property investment ownership or are adding to your real estate investment portfolio, we can help you determine if a 1031 exchange or other tax deferral strategies may be suitable for you. We're happy to answer your questions and help you explore your options. Contact us today to schedule a consultation.
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