Regardless of your experience as a real estate investor, it’s essential to diversify your investment portfolio. This is also true for your mutual funds, stocks, and bonds. By diversifying your real estate portfolio, you open doors to investment opportunities and limit the risks simultaneously.
Fortunately, real estate offers various ways to diversify. There are many kinds of properties to purchase at different risk levels. In fact, even new investors can scale their growth and boost their return on investment (ROI) and cash flow.
If you’re thinking about investing in real estate, make sure to learn the fundamentals first. For example, being a residential property landlord is not the same as owning commercial property.
If you’re interested in investing in commercial, perhaps read a beginners guide to property investment.
Our tips are generalistic and apply to both types of property investment. How can you diversify your real estate portfolio effectively?
1. Vary Your Asset Class
When you’re diversifying across asset classes, it’s crucial to understand the trends in human behavior during busts and booms. For instance, most people tend to rent luxurious and bigger apartments in sought-after locations during times of economic growth.
On the other hand, during tough times such as recessions, they often downsize, move across town, and find a moderately priced apartment.
Since the world of real estate is cyclical and nobody knows when a recession will hit, it’s crucial to diversify across asset classes to ensure that your real estate portfolio is profitable regardless of the market cycle.
2. Consider Other Asset Types
Real estate is a unique area of investment due to the variety of asset types you can choose from. Depending on your preferences, you may invest in everything from small multifamily properties to single-family homes to big apartment complexes. You may also invest in self-storage, office space, industrial, and retail.
Multifamily properties offer new real estate investors the most convenient and easiest way to diversify their financial investments. They include different housing units, which host various tenants and which can be rented out separately.
As a landlord, you’ll gain more rental income while spreading the risk across several units. Moreover, since it’s unlikely that all the units in your property will remain vacant simultaneously, there’s a low chance of getting zero returns. Even if there are units that remain unoccupied, you’ll still earn from your occupied units.
Investing in different asset types makes it possible to protect your hard-earned money from macro changes, such as the shift in retail space that’s happening due to e-commerce growth. So if you want to establish a solid real estate portfolio, you can’t go wrong with diversifying by asset type.
3. Think Of Location
The real estate market may vary from one place to another. Once you diversify across various locations, you can make the most out of the ups and downs of different markets and hedge your bets against major changes.
If your real estate investment is only within one market, your portfolio will be in jeopardy once the market hits a slowdown. But if you have investments in different locations, the impact on your real estate portfolio is lesser.
If you decide to diversify across various locations, search for markets with high population growth, job growth, and job diversity. It’ll ensure that your investment is on the right path to achieving growth in the long run.
4. Experiment With Various Financial Options
Another way to diversify your real estate portfolio is by experimenting with various financial options.
Most investors pay in cash whenever they can, while others prefer to take the traditional mortgage. You may also find a better deal if you consider owner financing.
Typically, you don’t need a big down payment, and once you structure the deal, you’ll find that both your ROI and cash flow will improve quickly. Always seek professional advice before taking on a mortgage.
5. Keep Your Risk Profile In Mind
A risk profile is generally the term used when people talk about their assets and investments. There are
three levels of risk profiles.
The best option for new real estate investors who don’t want to take on many risks is stable assets.
Look for properties that will attract trustworthy tenants and have compliant leases where everything’s covered.
There are many homes for sale that other buyers don’t want simply due to their dated style. These are the properties that require renovations or updating. You’ll get the best price for them, but you may need to invest time and money to get good returns.
The risk is high for these properties when a renovation turns out to be more costly than expected, but there’s also a high possibility of getting excellent returns.
These types of properties require more work before you can think of earning or renting them out. They often need a business plan, since there’s so much effort needed to get the properties up to the market rent.
If you’re the type of investor who sticks to a certain risk class, don’t hesitate to purchase a property that fits other risk profiles. This will help you challenge yourself in real estate investing, and it can make a difference in your portfolio.
Those are just some of the many ways to diversify your real estate portfolio.
Diversification allows you to build a balanced portfolio, enabling optimal returns while also reducing your risks. However, before you take your first step in diversifying your portfolio, remember that it’s crucial to understand your needs and the risks involved in your preferred real estate investment option.
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