How To Build A Passive Income Portfolio From Scratch


The right passive income portfolio is capable of producing quality cash flow well into retirement. In fact, most real estate investors will turn to passive income exit strategies when they want to secure their future. If for nothing else, passive income is the perfect compliment to a secure nest egg. Combined with responsible spending habits, the right passive income portfolio can be your key to financial freedom. However, the best passive income portfolios are not simply made overnight; they are the result of years of work. If you want to start building your passive income portfolio sooner rather than later, I recommend using the following to get started.

Passive Income Portfolio Building 101

Passive income cash flow

The best passive income portfolios won’t build themselves. In fact, for a portfolio to become truly passive, you must put in a lot of leg work upfront. To get things rolling, start with the following:

Draft A Realistic Financial Model

No lucrative passive income portfolio will come to fruition without the assistance of a plan, or a strategy to set things in motion. If for nothing else, establishing a blueprint for what you hope to achieve with your upcoming real estate endeavor should clarify your approach. Having said that, the first thing you need to do if you hope to build a lucrative passive income portfolio is to draft a realistic financial model. What is it you want to accomplish by obtaining rental properties?

In creating a financial model, you lay the groundwork for your entire buy and hold career. For what it’s worth, a well-drafted financial model is entirely capable of projecting cash flow over the life of a project. Without an idea of what to expect, there is literally no way you can ever hope to realize success with any degree of predictability. If real estate has taught me anything, you must have a system in place to realize success, and nothing compliments a system more so than a plan.

This is the part of the plan where you will run the numbers to make sure a property makes sense. Be sure to include a line item for each stream of income, and even more importantly, each expense. Only once the numbers make sense can I recommend moving forward with the initial phases of starting a passive income rental portfolio.

Identify Each Unit’s Target Cash Flow

While drafting a realistic financial model will require an acute attention to detail and an even more precise market analysis, it is by no means the only step in forecasting a profitable business model. As you have probably guessed, the model is just the first step; the second step will have you populate said model with real data. This is where you will have to put in a significant amount of groundwork.

At this time, you will be required to conduct the appropriate research. I can’t stress how important it is to mind your own due diligence, given the gross amount of misinformation made available to the masses. I encourage you to confirm all of the data you are presented with, as it is always safer to measure twice and cut once. That said, the more data you collect on a subject property, or even on a subject market, the more accurate your forecast will be.

In choosing a property, prospective passive income investors are advised to contact landlords and brokers in the region for a first-person analysis. Nobody will be able to give you more accurate information than those that already have boots on the ground. Delve in and uncover trends revolving around costs, rents, demand and income.

Once you have compiled the data and are confident that it is as accurate as it is going to be, proceed to draft a financial model for as many similar properties as you can find — otherwise known as comparables. Next, create a single financial model using the average of every model you recently created. The process will essentially uncover an average of what you can expect from a single subject property. It is important to note, however, that this step should result in an expected cash flow estimate for a single unit. Before moving forward, it is important to identify what you can expect to receive from renting out a property.

Identify Your Desired Cash Flow

Running the numbers on a subject property has just as much to do with objective cash flow as it does with the amount you deem necessary. If for nothing else, managing a passive income portfolio is intended to provide a stream of income capable of maintaining the lifestyle you deem important. In other words, the right passive income portfolio will generate the amount of income you need to maintain the lifestyle you desire. With numbers in hand, you will have an official goal to shoot for.

Building A Passive Income Portfolio

In following these steps, you will have an idea of the amount of money you need to live comfortably and the amount of properties it will take to maintain said lifestyle. However, it is important to note that the research you have conducted up to this point is just the beginning. Now it is important to implement all that you have learned to maximize your retirement investments.

There are several ways to start a passive income portfolio, but I am confident one holds an advantage over all others: multiunit properties. I am convinced that the easiest way to start your own passive income portfolio is to invest in a multifamily unit you intend to live in yourself. No other way, at least that I am aware of, will allow you to get into a property with less risk and upfront costs.

Consider this; acquiring a two unit property will simultaneously give you a place to live and an additional unit to rent out. This method significantly reduces the expenses that may be asked of you. Instead of accounting for the costs of two separate properties, you only have to worry about one roof, one yard and probably one plumbing/electrical system. While the consumption will probably be double that of a single household, the maintenance will not. In fact, the maintenance will probably be no different than if you were living in your own detached home.

What’s more, it is entirely possible for the additional unit you are renting out to pay down your entire mortgage, if not more so. In the right market, investors can very easily have their monthly mortgage premiums paid off by the subsequent unit they rent out. That said, committing to a multiunit rental property is typically the best way for investors to start a passive income portfolio.