How to Build a $10 Million Rental Portfolio in 10 Years
How to Build a $10 Million Rental Portfolio in 10 Years
Building a $10 million rental portfolio in a decade may sound like a lofty goal, but it’s not only achievable—it can be done faster with the right approach. I know this from experience because, while I didn’t start out doing everything perfectly, the lessons I learned through trial and error can save you years of mistakes and lost time. This is how I operate today, and how I wish I had started operating 19 years ago (I'd have $70-100 million in assets). Here's how I would approach building a $10M rental portfolio in 10 years if I could do it all over again, starting today.
Make It Your Second Job
I'm making an assumption that you don't have a couple million bucks to start this thing off. If you do, it's an entirely different conversation.
The first thing you need to understand is that building a rental portfolio at this scale requires dedication. Treat this like a second job and put in the time to learn essential skills. Consistency is key to achieving success:
Repairs and Maintenance: Learn how to perform basic repairs, maintenance, and even renovations. You don’t have to be a master of everything, but understanding how long things take and what they cost will give you a major edge. Be thoughtful about the work that you take on and what you contract out. You're not saving any money on a renovation that takes you a year to complete, the lost rent more than makes up for the contractor's charges.
Getting Quotes: Regularly get quotes from subcontractors (subs) and ask them how they calculate their pricing. Over time, this will help you estimate future project costs more accurately and bid jobs effectively when outsourcing. You'll need to award jobs periodically to any subs you want to consistently keep giving you quotes or answering your questions. These relationships are valuable, be honest with them and let them know that the faster you scale the more you will need to utilize their services, so the information they can share with you will help you achieve more.
Pay Yourself for Work: Whether you’re doing repairs, maintenance, or managing properties, treat yourself as a paid contractor. Assign a realistic cost (based on calculations you receive from your subs) to your time and pay yourself—this ensures you understand the true cost of DIY work and trains you to think like a business owner. It also allows you to evaluate what is the best use of your most limited resource, your time. As your business grows your available time will remain roughly the same (until you quit your day job, if that is a goal for you) so it's important to ensure you're utilizing it correctly.
An important point on this. "Pay Yourself" usually means simply transferring money from one account to another. You should be careful and discuss with your CPA how to ensure that you don't create a tax issue with your method of paying yourself.
Don't get distracted with third party work: Doing work for others can seem like an obvious way to create cash flow, but doing construction/renovation/make ready/management work for yourself is not the same thing as doing it for others. The amount of resources required to do it for yourself is minimal, but once others are involved they become greatly inflated. For example, you don't have to sell yourself anything, but every other customer will need an estimate, a sales process, a management process, and when problems arise you'll need to resolve those. If you want to turn this kind of work into a day job I highly recommend hiring an assistant or operations manager to do this work 100%, so that you can focus on it at 50% or less. Your primary focus should be building your investment portfolio and passive income. Doing third party work will at best become a job, and at worst become a distraction and a capital drain that slows down or stops your progress towards your real goals.
Leverage Subcontractors and Tools
You won’t be able to do everything yourself—and you shouldn’t. Here’s how to strike the right balance:
Use Subs for Large Projects: Delegate big jobs, such as repiping, rewiring, or large drywall repairs, to subs. Here are some broad rules that may help you narrow down whether to DIY or outsource, but you'll need to come up with your own framework:
If the project will take more than a week
If the repair is an emergency and you're not 100% sure you know how to fix it or it would be inconvenient to stop what you're doing and fix it.
If it's in the middle of the night
If the project requires more than one person
Invest in Equipment: A paint sprayer, for example, will pay for itself after one job. Strategic equipment investments can save you significant time and money. Be careful with this, don't buy equipment if you aren't sure you'll use it again within a year or two at the longest. If you're using that infrequently it will make more sense to rent. Use your highest or most consistent hourly earnings rate to determine the payback period for equipment for renting or buying decisions. Warehouse space and even your home garage or storage shed space costs money, you don't want to fill it up with tools that are used once and then never again, or every few years. This is an investment and it should have a** clear** and** quick** payback period.
Fund Your Growth Strategically
Use Half Your Salary for Down Payments: If you’re serious about scaling your portfolio quickly, sacrifice personal spending and allocate 50% of your take home salary to use for down payments on rental properties.
Set Up Proper Reserves: Establish reserves based on the number of units you own, and contribute to all of them religiously every month. This will protect you from unexpected costs and keep you out of financial trouble. Example reserve funds are tax/insurance, make readies, maintenance, capex, and vacancy. These should be totally separate bank accounts and the funds should not be comingled with each other or operating funds. If it becomes necessary to tap into your reserves for operating funds you should step back and look for a problem. Tapping reserves for operating funds is the first step toward total failure and may be the indication that this business isn't working out or is growing too fast or you or one of your contractors is not executing properly.
Option 1: Annual Budget Method: Set an annual budget based on expected expenses, divide it by 12, and contribute that amount monthly to your maintenance reserve account. Pay all maintenance expenses directly from the reserve account.
Option 2: Buffer and Reimbursement Method: Use the reserve account as a buffer. Contribute a set monthly amount and reimburse your operating account when maintenance expenses exceed a certain threshold (e.g., over $40 per month). For example, $100 per month total budget for maintenance, $60 goes to reserve every month, whenever I spend more than $40 in a month I reimburse the operating account from the reserve for the excess I spent.
I've done it both ways, and it works both ways. If your accounting system will allow to pay your expenses from your reserve accounts without a bunch of extra bookkeeping entries that's the way I prefer it.
Set yourself up for cash flow: Even if it requires slower growth than you might like the smart way to build a portfolio is to set up your projects to ensure guaranteed cash flow. Everyone has their own version of the "right number" but I would recommend a minimum of $50 per door AFTER all debt service, costs, and reserves are accounted for. Costs would include property management whether you're doing it or someone else is.
Focus on Value-Add Properties
Buy Cheap, Fixable Properties: Focus on properties that need mostly cosmetic repairs (paint, flooring, minor fixtures). You can handle these upgrades yourself to build sweat equity, and they're the repairs that add the most value with the least risk. I would recommend even as you become more experienced to lean away from major remodels and towards new construction if you want to start taking on major projects.
Reinvest Your Earnings: Pay yourself for the renovation work and reinvest that money into your next property. This builds the habit of reinvesting and compounds your growth.
Self-Manage Early On: Manage the properties yourself to maximize cash flow and get a better understanding of what to expect and what CAN be done, but be sure to pay yourself for property management duties. However, understand that property management is resource-intensive and should be outsourced once it’s no longer the best use of your time. It can be extremely difficult to effectively deal with tenant issues and construction issues simultaneously. They may seem similar but in reality they are two different animals requiring two different skill sets.
Track Your Time and Outsource When Necessary
Time vs. Revenue: Keep track of the time you spend on renovations, maintenance, and management. Once your hourly income from your day job or other high-leverage activities exceeds what you’re making from hands-on work, it’s time to outsource.
Depending on your dayjob the opposite may be true too. There may be a point where it makes more sense for you to focus on doing hands on work because the hourly earnings are consistent, abundant, and pay significantly better than your dayjob. This is compounded by the fact that the hands on work also creates passive income once projects are completed, which makes it scalable, which your dayjob is not.
Eliminate Tasks in Reverse Order: Cut back on lower-value activities first. For example, start by outsourcing property management, then routine maintenance, and finally, larger renovations. Repairs and make readies are two that often have a disproportionately high hourly rate because of the "stop and go" of the work from a vendors point of view. If you can find GREAT handyman freelancers that will do this work at your desired quality level and for a reasonable rate (less than what you're earning elsewhere) they can be very valuable.
Vendor lifecycle - Be aware of the vendor lifecycle. This is the reason you should always be looking for new vendors for every trade, keep a running list of them, rotate through 2-3 regularly and remove/add to the rotation as needed. Your relationships with your vendors is extremely important, you should be doing what you can to ensure you're keeping it good and adding new vendors to the list consistently. The lifecycle is:
Vendor does great work for a reasonable price
They get busy and it changes in one of three ways:
The price goes up
The quality goes down
Their availability goes very far into the future, making them unusable for almost all tasks
There is no exception to this rule.
Scale Strategically and Upgrade Your Portfolio
Shift from Quantity to Quality: Early on, prioritize acquiring as many cash-flowing units as possible. Once you have a solid portfolio, start upgrading to higher-quality properties. The size of the portfolio will be determined by your strengths, available time, and the capability and talents of your vendors. However it usually is around 10 for most people. There is NO advantage for scaling a huge portfolio of low quality properties. They depreciate, have high maintenance costs, high turnover, high resource usage, and are generally more difficult to manage whether you're doing it yourself or not.
Upgrading: Upgrading comes from two directions. You'll need to start selling off your lowest performing properties (10% of your portfolio minimum annually) and of course you should still be saving money and reinvesting money (from cash flow, and DIY earnings) to buy new units. When you sell a property make sure the replacement, higher quality, property has equal or greater rent revenue. You can expect that the cash flow will be lower, but so will the expenses and management overhead. It's common to replace a duplex or quadplex with a single family home. So long as the rent revenue is equal or greater you're on the right track.
1031 Exchanges: When you sell a property make sure to discuss it beforehand with your CPA or whoever does your taxes so that you know what your expected tax exposure is for the liquidation. If it is significant you may want to consider a 1031 exchange to defer that tax expense (your tax advisor should be able to provide more information).
Keep Reserves Optimized: Adjust your reserves as you scale. Reserves should be per door, not per property. Minimum recommended reserves include:
Vacancy: 2 months’ rent
Make-ready: $2,000
CapEx: $5,000
Maintenance: $2,000
As your portfolio grows, you can reduce the reserve requirements per door using a calculated formula. You can also utilize excess reserves to reinvest them. As you liqudiate lower quality properties you may find yourself with significant excess reserves. They can be invested separately or withdrawn and added to your central investment portfolio growth funds.
Standardize Your Operations
One of the most effective ways to streamline growth and reduce headaches as your portfolio scales is by creating standardized systems for key processes. These include setting up consistent procedures for tenant screening, lease agreements, property inspections, and handling maintenance requests. Use templates for common documents and workflows (like inspections and make readies) to reduce decision fatigue and errors. Consider implementing property management software (this can be low cost or free, there are lots of options available) to keep everything organized and trackable. By standardizing, you’ll not only save time but also improve the consistency and quality of your operations, making it easier to hand off tasks to others as you scale. Standardization of your paint colors, construction materials, fixtures, etc can not only simplify but can also reduce costs by buying in bulk, just beware if you're going to create a large stock to factor the cost of warehouse space, and create a good inventory system. Saving on your purchases doesn't mean much if you give the savings back on warehouse rent or items "growing legs and walking off".
Exit Strategy and Long-Term Goals
Day Job Replacement: Don’t quit your day job until your cash flow exceeds either 2x your salary or $5,000 more than your current salary, whichever is higher.
Diversify: As your portfolio grows you should consider different locations and asset classes. $10mm is for certain a large enough portfolio that it should include more than one location and more than one asset type. Every location and asset types will have their own lessons to teach, so don't rush into anything and don't overleverage yourself.
Condense and Upgrade: As you grow, you can choose to condense your portfolio by exchanging lower-quality multi-unit properties for high-quality single-family homes or multifamily buildings to improve overall property performance and reduce management headaches.
Reallocate Excess Reserves: Once your reserves hit their minimum thresholds, reinvest the excess into new properties or other investments. I recommend using unleveraged purchases to build stability.
De-Lever: Another option for the long term is to start de-levering your portfolio, which simply means paying off debt and holding your investments free of financial obligations. This will obviously increase your cash flow, and decrease your risk. Be aware that I've seen this strategy backfire more than once by creating complacency, laziness and a lack of focus, so it can be a double edged sword. You can combat that by continuing to grow and upgrade your portfolio even though you're doing it with no debt.
Use Reserves for Life Insurance
Consider using excess reserve funds or proceeds from (non 1031) property sales to purchase permanent life insurance through front-loading or smaller policies tied to each sale. This adds a long-term wealth-building element to your portfolio and provides an extra layer of financial protection.
The reserve fund that is easiest to make a case for using whole life insurance for is the tax and insurance reserve. Since these funds are needed on a predictable schedule and a relatively predictable amount you can fund a whole life policy with enough to cover one years worth of expenses and it should self fund from there out providing excellent tax free returns on that money and a life insurance benefit as a bonus. We'll do another blog article in the future that dives further into this concept.
Final Thoughts
Building a $10 million rental portfolio isn’t just about buying properties—it’s about strategic planning, leveraging your time and resources, and reinvesting your profits. By making smart decisions early, managing risks with reserves, and continuously upgrading your portfolio, you’ll be well on your way to financial independence.
Recommended Reading:
The Millionaire Real Estate Investor by Gary Keller
Profit First by Mike Michalowicz
Wheelbarrow Profits by Jake Stenziano and Gino Barbaro