How to Diversify Your Rental Portfolio for Financial Freedom Faster

0:00Should you diversify your investments with a new strategy or double down on a formula that's worked for you in the past? It's a question you'll almost certainly encounter as you scale a real estate portfolio and take steps towards securing your financial future. Today, I'll explain how to answer.

0:22Hey everyone, I'm Dave Meyer, head of real estate investing at BiggerPockets. You might only be 10 years away from achieving financial freedom if you start investing in real estate now, and this podcast teaches you exactly how to do that. Today on the show, I have Garrett Brown here with me. Garrett is BiggerPockets short-term rental expert and the host of the BiggerStays YouTube channel. But Garrett, the reason you're here today on this episode is because you're actually thinking about expanding your own investing outside of short-term rentals. Is that right? Yep. I've dipped my toe in the many facets of real estate investing before, but I got the short-term rental bug and went full force there.

1:01But now I think it's time to maybe explore a little more diversification as I try to grow my portfolio. I love it because this is such a personal question. I don't know if there's really like a one size fits all. Like, should you keep doing what you've always been doing? Should you explore new diversification options? So I'm excited to get into this with you today, Garrett. And actually, Garrett has brought three different real-life deal options that he's actually considering pursuing. He's got a triplex in a new market that he could long-term rent. He's got a short-term rental or two new-build single-family homes he's considering.

1:38So what we're going to do is we're going to break down the pros and cons of each investment and explain how we think about these deals in relation to Garrett's existing portfolio and his future goals. So even if Garrett's specific situation is different from your own, because of course it will be, the questions we're answering today are the same sort of thought process that you can use to ensure you're making the best investing decisions for your own future when you're ready to jump into the market and make your next purchase. So let's just start there. Garrett, maybe you just tell us where your portfolio stands today and tell us a little bit about your goals that you're trying to pursue through real estate.

2:18So I currently have one long-term rental, but I own eight short-term rentals and I manage seven short-term rentals for other people. And so I kind of got way further in the short-term rental investing side than I expected. And I love what I do and I love this niche of it because I like the creative side. But I think the one thing that I get disappointed when I hear short-term rental investors and gurus, I have quotations going, is that they talk about how passive it is and how easy it is. And I'm here to tell you that when you're doing short-term rentals, it is real estate mixed with a business.

2:52And so I'm growing a business on that side, but I need a little more diversification in my portfolio to not rely on one subset of it, but then also have some different advantages and maybe just take a little pressure off myself of having another rental that is almost a 24-hour job. So I'm kind of exploring to see where I can end up in five to 10 years from now and hit my financial freedom goals. That makes a lot of sense. I think that diversification is kind of a point that a lot of real estate investors reach, but not necessarily just for risk mitigation, but just for time too, because you said you have one rental.

3:30How does managing that compare to, for example, managing one of your short-term rentals? It is extremely easy because I know all about the tenant application process. I know that being a realtor. So I've been blessed with great tenants over there. And it's been amazing as compared to short-term rentals, which I built out systems and it became a lot easier, but it seems like there's always something you're dealing with with a guest. So I'm very excited to explore the possibilities of the long-term rental side, at least getting getting some of my time back and having a good appreciating asset. So you said about your goals, you said five to 10 years, like, do you have like a financial goal?

4:08Are you trying to be fully retired? Do you want to be work optional? What are you working towards? I would like to be work optional in about 10 years and being in Texas and near Houston, Texas, there was some report I saw that I think five of like the fastest growing, like top 25 zip codes in the country were near Houston. Oh, I'd buy that for sure. So I'm trying to like bank into the appreciation that's out there too. Like I get a ton of cashflow from my short-term rentals. I get a ton of tax benefits already. So I personally am leaning towards probably the appreciation side, but there's, as you know, there's, there's, there's pros and cons to every single deal you're looking at.

4:46So I'm, I'm just kind of wading in the water right now. So I'd love, you know, hearing your, hearing your thoughts as I'm kind of, you know, going down it. I love this. Talking to people about portfolio strategy is my favorite thing in the world. So I'm very eager to do this. I'm very, very lucky to talk with you about it. So let's make it happen. All right. So tell me about, let's just start with the first deal that you're interested in. What does it look like? So I live in an area North of Houston. It's about 45 minutes, Conroe, Texas. It's been named multiple times as one of the fastest growing places in the country.

5:19There's been a deal that's kind of been on my eyes. It's in a really nice neighborhood. It's a triplex, two one bedrooms and then one studio. So a little smaller, it's a little older, but some of the bones were renovated. It's, it needs a little sprucing up. How old? I think it was 1982. Oh, that's not bad. That's not, it's not terrible. It's not terrible for sure. It's not 1928, you know, so it's not. I was born in the eighties. So I don't want to hear that. That's super old. From a housing and construction perspective, that's not that bad. It's not terrible. So, and they've, they've done a little work on it.

5:53They had it listed at like $450 ,000 for months and it was way overpriced and they've kind of gradually been dropping it. They have it at, I think,$375 ,000 right now. I know what I need to get it at. It's a little bit lower than that. But as we know, this is a good market to make a couple of disrespectful offers in, especially in my area. Yeah. That's a market value offer. If no one's buying, it's not disrespectful. You're offering market rate. Absolutely. So I think my biggest concern with this property and why it's been kind of holding me back is the appreciation. What I'm seeing at this moment isn't as good as, you know, downtown Houston or where I'm looking at with these new constructions.

6:32I could see where appreciation over 10 years could be pretty tremendous in this area, but it's hard to kind of pinpoint. But the other big concern I have with this is it's in a really nice neighborhood, but we both know what comes with really nice neighborhoods, really high HOA fees for this type of conflict. Oh, it's HOA. Okay. It's about six something a month, which is, yeah, because it's kind of like a townhouse. It has a community club in it. Like it's one of those kinds of places, right? Oh, cool. Well, I was liking everything until I heard the outlets. Let's keep going now. So, you know, like just to give some like quick, simple numbers on this, like I have about$100 ,000 to invest.

7:08So I didn't mention that from before. That's about the base number I'm working with in cash in my possession of the why I'm looking at these type of deals and analyzing these specifically. So went to about 20 % down with say we get about a 7 % interest loan, 30 year loan, the gross income I'm estimating between all the units is going to be about 44 ,000 per year. My expenses estimated about 19 ,000, which leaves me with about$25 ,000 in NOI. And then annual mortgage is about$20 ,000. So my cash flow is sitting at about five to$6 ,000 a year. It's probably about an 8 % cash on cash return. That's with the HOA?

7:51That's with the HOA. I think some of my concerns are, um, it's not as high of an appreciating area as some of these other deals we'll talk about. And then I'm worried that the HOA could just, they could keep going up. Like if they're already at six, six 50 or whatever they're at, like and they have like a community club and it's a little more hoity-toity or you know whatever words you want to use for yeah i'm a little worried that you know after a couple years they're like okay your hoa is a thousand dollars now you know so yeah right that's that's the thing that's hard and you know they seem like they have good financials on their hoa from what i've seen but as we both know like sometimes things aren't it's always what they seem when you walk into something they could show you something and then it's a total another way so they can see i'm not too concerned?

8:34Like it will have a small amount of vacancy, but this is a pretty, pretty good area, pretty fastly growing area. That was going to be my question. It's just about rental demand in this area. Because a lot of times when you're in these like nice HOAs, like everyone is a homeowner, you know, there aren't as many renters. So I was just curious if you have any read on, is there a renter population in the area? Yeah. It's actually pretty high for this one. Cause it's right on the lake. That's really popular there. And they have, it's a big community to where they have a ton of single family houses and a ton of like condos, townhouses, a couple multi-families, just like they have quite a few triplexes like this and that are in the market.

9:13So it's kind of like its own big community. So rental demand is pretty strong, not as high as probably one of the other deals we'll talk about, but I'd say vacancy between all three units is probably going to be about 5%, I would say maybe 10%. Yeah. Yeah. It's not bad at all. So then you mentioned appreciation. So you said it's not as good. Like what, what has appreciation been over the last couple of years? Cause Texas has kind of been one of those markets where some markets still growing, some are tanking. What are you seeing? Just from what I'm kind of seeing in the data out there, it seems like it's around 3 % for the area, which is normal.

9:50It's pretty normal, but I, you know, as a realtor, one thing that I really, really look at, especially realtor and investor is like where are all the big home builders going and building tons of communities because my guess is that they have way better data than I do of like where people are moving to and this area has had a mass massive influx of dr horton lennar every single big home builder is just building tons of communities here and so I don't know if that's a a red flag to me you know like I'm gonna be competing against all these new construction single family homes and I didn't mentioned the triplex is they live on top of each other so it's not like separate units they're all you know it's like an apartment style more which isn't my favorite yeah so yeah so i've been battling with that and trying to figure out you know the same thing there like is this the route to go or should i lean into some of these new constructions that are coming out there that may not have as high of cash flow but there's a lot you know a lot of positives of those too so yeah for sure racking my brain this one is intriguing i i wouldn't say at this point i'm like the HOA, if it wasn't an HOA, I'd say it's almost for sure.

10:57Yes. But that one is a little bit nerve wracking. And just for everyone's knowledge, HOA is homeowners association aren't necessarily bad. It just introduces an element of risk and unknown that you may not want as an investor. There might be great HOA is that actually had a lot of value because they make the property values go up. There are really bad HOA is that mismanage money. And then there were special assessments. And that's the challenge. That's why I think Garrett and I are both saying this is an unknown. Not necessarily you can't do it, but it does add a question to this deal. Yep. So last question about this one, though, Garrett, is rents.

11:36You're getting about$3 ,300 a month in rent. Is that current? And do you think go up at all? I think they currently have tenants in two of the units, and it's getting$1 ,300 for the one bedrooms and then i think the studio is open and they had it for around 1150 but it hasn't been rented so i'm guessing it will be in the 1100 range so it's about 37 100 a month and i think they will be able to gradually increase i could do a little bit of renovation on the inside like a little bit of cosmetics here but you know i wouldn't want to over renovate it for this particular area uh so that's kind of why i've been on there so i wouldn't say rental growth is super high.

12:15I'd probably say it's probably very similar to the appreciation rate of the area in general. So that's kind of where I'm at with it. Not bad, though. Yeah, it's not bad. Yeah, it's good. I mean, I invest in a syndication in Houston and rent growth has been a struggle there because there's been a lot of building. And so I'm just curious about that. Yeah. Well, I think this is an interesting deal. There's a lot to like about this. So I think you got a legit lead here, but we obviously have two other options to consider. We are going to take a quick break, but we'll get into those two other deals right after this.

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15:28welcome back to the bigger pockets podcast i'm here with investor short-term rental expert and maybe you know a guy who's going into new construction or long-term rentals here garrett brown before the break we talked about a potential long-term rental for a triplex in the Houston area, solid numbers, but there's an HOA, which is kind of calling into question, you know, at least raises a couple concerns about the deal. So what are the other deals that you're looking at? So the second deal that I've been kind of kicking the tires a lot on is a short-term rental that's closer to downtown Houston.

16:06There's a few areas inside of Houston that are actually unrestricted. Even there's some of the biggest ones, most popular downtown Houston is one. There's another one called Houston Heights. These are areas that are unrestricted places that typically will allow short-term rentals and they're not residential neighborhoods. Even though Houston is the home of townhouses, we built so many townhouses in Houston that they're everywhere. As I've been looking at these deals, there's a townhouse, there's no HOA. It's in a really, really good area. It's about$450 ,000. I'd have enough for the down payment and I can work out some seller concessions probably.

16:41If I run it as a short-term rental, you know, downtown Houston, there's a lot of competition out there, but there's also a lot of demand still, surprisingly, of people, you know, there's so many people come to Houston. I could probably make about, as is, about$60 ,000 to$70 ,000 in revenue for a year. If I spent another$50 ,000 to$60 ,000, which I currently don't have, so I'll have to figure that out with maybe some creative things or maybe partner with somebody. If I put another$50 ,000 or so into it, I believe I could get it up to about$85 ,000 to$90 ,000. Again, this is all the data I know and everything I know about short-term rentals, but even then, it's still not absolutely going to happen.

17:22The big thing that weighs on me for this one is the taxes are so high in this area. Oh, really? I think it's about$800 a month in just taxes, property taxes, very high rate being in downtown Houston. And, you know, it's about a half a million dollars. So, yeah. So I'm paying about$10 ,000 to$11 ,000 per year in property taxes. Texas is great because we have no state income, but they make that money back up on their property taxes. Yeah, it's one of the highest tax rates in the country property tax wise. The average for the country is about 1%. I think Texas on a state level is above 2%. And I think some of the municipalities, like you said, downtown Houston might even be above that.

17:58You can get to 3 % in some places in Houston very, very easily. Yeah. I mean, that is sort of at the same level of the HOA we were just talking about in terms of cash flow. And although, you know, I'm I don't think taxes are as unpredictable as an HOA, you know, it could still go up to if if they're going to appreciate as well. So what's your like, what's your gut, you know, better than I do about what your cash cash on cash return would look like in a deal like this? I like being very realistic, like without putting the investment into it, the extra$50 ,000 and just, you know, setting it up as how it is.

18:32I think we could get to about 10 to 12%. And I'm a little different than other people too, because I have a team built out for short-term rentals. Like I have a business for short-term rentals. Not everybody has that capability. So it's like I have assistants that can help. And like this falls in line to what I already do. But it's, it goes back to, you know, am I putting all of my eggs into one type of real estate? investing basket because I get a ton of tax benefits from buying another short-term rental, especially with 100 % bonus depreciation coming back. This is a townhouse too, so there's not much land.

19:05So the bonus depreciation is going to be pretty high because it's mainly on the structure and everything involved in it. I think my other kind of worry is that it's so tied to the short-term rental performance and regulations still too. And I have always not been a big fan of investing in short-term rentals in urban areas for these particular reasons. It's vacation rental areas. They depend on short-term rentals. They're not going away anytime soon. A place like Houston, it's still up in the air. You never know. I always get a little worried. Insurance is so much higher on short-term rentals. It's probably double what I'm paying for landlord insurance usually to get good proper coverage.

19:42It's a highly competitive market. It is. I'm a I'm very good operator. Like I went to school for hotel management and I still am scared of the competition and saturation that's in some of these markets. So I think the appreciation will be pretty high though, cause it's a really good area. It's in downtown area of Houston, which is to my knowledge is going to hopefully just keep going up quite a bit, but you never know how some things to go. So that's kind of what's worrying me with this one. I'm not a hundred percent sold in. And again, like I kind of want to diversify my portfolio. So I know I'm hearing it in your voice.

20:15I don't feel like this is the one for you. Like this, you seem skeptical about this. I'll just, one question just for audience education as well is like, if you had to, what would this rent out for long-term? Like if something happened regulation wise? That is one thing that is like, gives me hope for this though. Cause it's still do good as a long-term rental. I think we'd be between about probably about 3 ,400 a month as a long-term rental. Just one unit by itself. It's a three-story townhouse, really nice view, has a rooftop deck. And I think the cash on cash return for that would be about six to seven percent because those taxes eat a lot into it.

20:50Still good. I mean, it's still very good. If the rents, you know, if rents are going to go up, it's going to get better. And I have the option to, you know, short term rental or long term rental or midterm rental, which, you know, is all options. Well, I don't hate this deal. I mean, it's like the numbers make sense. But I think you're you know, this market, you know, short term rentals better than I do. your instinct about the risk, I think is probably the most important element here. And you don't seem in love with this deal. And it's not really aligned with your strategy, right? Like you want to diversify.

21:21So I get why you would consider this because I do this sometimes too, where I'm like, oh, I should diversify. But then you just find one that's like doing the same thing that you've always done. It's just a layup and then you just do it again. But it sounds like this is not so great that you would forego the diversification benefit that you're looking for. So I think we got to move on to the third deal. All right, we got to take one more quick break, but we'll hear about Garrett's third deal option right after this. Finding a strong rental property usually takes time, research, and calculated risk.

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