Tips on building your investment portfolio

One of the questions I am often asked is how my portfolio is composed. Do I own single or multi family properties?

The long answer is I don't own anything... I control a bunch of assets but I don't own any of them. But that's for another time when I write an asset protection blog :)

Here's the short answer.

Here's how I think about investing for cash flow. There are 2 components:

1. Income I NEED

2. Income I WANT

What's the difference?

Well, income I need is what I use to cover my living expenses - bills, food, utilities, mortgage, fuel, school fees for the kids and so on.

Income I want pays for gadgets, holidays, dinners out etc - stuff that makes life enjoyable but isn't a necessity.

If you've read my previous blog post on Single Family homes vs. Multi Family you'll know I mentioned tenant stability in there. Simply put, single family tenants tend to be more stable and stay longer than multi family. So how do I use this?

Let's say for the sake of simplicity that my total income is $10,000 per month which is a common figure people throw around.

Also for ease of calculation, let's assume that $5,000 of that is to cover my needs and the other $5,000 of that is to cover my wants.

Here's how I would structure it:

I would have single family homes that cashflow the $5,000 I need and multi family cashflowing the other $5,000 for the wants.

Why? Well my needs will continue to come in month after month - it's hard to adjust some of those expenses and so I need consistency of income which the single family homes provide.

My wants I can change around and adjust based on what comes in. If there are delays with rents in the multi family properties, I can wait to take that vacation or maybe eat at home - not a huge issue. But if my mortgage money doesn't come in, I'm stuck.

So the obvious question then is, why not just buy all single family homes? Well simply put - price.

To buy $10,000 worth of monthly income with single family only can cost 2 to 3 times more than with multi family depending on a range of factors.

In Columbus, Ohio for example, you can cashflow a net of $5,000 a month if you invest about $600,000 in single family homes.

To do the same with multi family, you need to invest approximately $400,000.

So you can see the difference - if you wanted $10,000 a month in income, you could get it by spending $1.2 million on single family homes alone.

$1 million on a 50 / 50 split of single and multi family equally or $800,000 on multi family alone.

What you decide will depend on your budget, investment strategy and risk appetite. But as you can see, there are many factors to consider when building out your portfolio.

Which is best for you will depend on whether or not you need the money every month (plan to live off the rents) or if it's just spending money and some volatility will not be a problem.

In simple terms, the higher the return, either the more you have to pay or the more risk you have to take.

My opinion is a 60% single family to 40% multiple family is a good portfolio mix that provides the stability needed to meet your obligations and a decent amount of 'fun' money built in as well.