5 Ways To Diversify Your Real Estate Portfolio

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. Diversifying your real estate portfolio opens doors to investment opportunities and simultaneously limits risks.

Fortunately, real estate offers various ways to diversify. There are many kinds of properties to purchase at different risk levels. Even new investors can scale their growth and boost their return on investment (ROI) and cash flow.

Residential, Commercial

If you’re thinking about investing in real estate, make sure to learn the fundamentals first. For example, being a residential property landlord differs from owning commercial property.

If you’re interested in investing in commercial, perhaps read a beginner’s 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 diversifying across asset classes, it’s crucial to understand the trends in human behaviour during busts and booms. For instance, during economic growth, most people rent luxurious and bigger apartments in sought-after locations.

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 investment area 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 can be rented 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 teams in your property will remain vacant simultaneously, there’s a low chance of getting zero returns. Even if units 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 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 needs and hedge your bets against significant changes.

If your real estate investment is only within one market, your portfolio will be in jeopardy once the market hits a slowdown. However, the impact on your real estate portfolio is lesser if you have assets in different locations.

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 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 used when discussing assets and investments. There are
three levels of risk profiles.

Stable Assets

Stable assets are the best option for new real estate investors who don’t want to take on many risks.

Look for properties that attract trustworthy tenants and have compliant leases covering everything.

Value-Add Properties

Many homes are 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.

When a renovation turns out to be more costly than expected, the risk is high for these properties, but there’s also a high possibility of getting excellent returns.

Distressed Assets

These properties require more work before you can earn or rent them out. They often need a business plan since there’s so much effort required to get the properties up to the market rent.

If you’re an investor who sticks to a particular 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.

Conclusion

Those are just some ways to diversify your real estate portfolio.

Diversification allows you to build a balanced portfolio, enabling optimal returns and reducing 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.