How and Why to Diversify Your Real Estate Investment Portfolio?
On the day you purchased your first piece of real estate, you swore to yourself that it would be a day you’d never forget. But then another property came along. And another one. And yet another one. Now, you truly have a robust real estate portfolio at your fingertips, and you couldn’t be prouder.
The question is, are you making the right moves to protect your investments? How sure are you that your real estate investment portfolio will remain intact for years to come, no matter what economic or real estate market changes may come your way?
While there’s no crystal ball that will definitely tell you the future of real estate in the months or years ahead, diversifying your real estate portfolio can increase your chances of staying afloat financially, no matter what the future holds. Here’s a rundown on why and how to diversify your investment portfolio today.
Why Diversify Your Real Estate Investment Portfolio?
Real estate portfolio diversification is where your portfolio’s investments vary in amounts that are relatively equal. Unfortunately, many new investors make the mistake of overlooking the need to diversify their real estate investment portfolios. And this is far from being a minor mistake.
Remember the Great Recession of 2008, when the United States’ housing market experienced a major collapse? Sadly, many homeowners ended up losing their homes. Also, many homes’ average value decreased drastically. However, your average homeowner wasn’t the only one who suffered.
Real estate investors whose prime focus was to rent out residential homes also suffered a huge blow. In fact, they likely ended up losing their businesses. However, real estate investors who obtained income from sources outside of residential properties had a greater chance of surviving the 2008 collapse.
Let’s take a look at how you can go about diversifying your real estate investment portfolio.
How to Diversify Your Investment Portfolio Tip 1: Invest in Different Areas
Each section of the United States features distinct characteristics that affect the real estate market. Therefore, if you invest in various regions of the country, it’ll be harder for sudden shifts in different geographic parts to detrimentally harm your investment business.
The reality is, the next real estate bubble could easily happen within a decade or so, based on historical trends. Of course, various factors might contain the next bubble to a certain region, delay it, or soften its blow. Nonetheless, a bubble will happen again at some point.
Therefore, it only makes sense to try to buy and hold properties in several markets when building your real estate investment portfolio.
Where to Look
If you’re looking for the top cities for apartment real estate deals, for example, note that many areas in the country’s interior have been promoted as the best for investors to focus on. This is because, in such cities, price cycles tend to be less extreme, and they also don’t happen as often.
Still, cities on the country’s exterior can also be great markets for real estate investors, if they offer strong job and population growth potential. Also, look for cities where civic groups and government officials are forward-thinking in their planning and development, as appreciation opportunities are likely to exist in these areas.
Note that, if you do diversify your real estate investment portfolio by investing in different markets, ensuring appropriate property management can quickly become complex. For this reason, it is critical that you look at all of your property management options in various cities prior to deciding to pursue property investments in these cities.
How to Diversify Your Investment Portfolio Tip 2: Invest in Different Types of Properties
In addition to targeting different markets for your real estate investment portfolio, consider buying different types of properties, too. Single-family homes are certainly an excellent way to invest because they don’t present many hurdles for investors, especially for beginning investors. However, if you are focusing on single-family residences, be sure to purchase homes across many price points.
In addition, try to buy apartment communities, commercial properties, and even industrial properties as well. In this way, losses in a certain property category won’t necessarily cause you to lose your business.
Apartment communities, in particular, offer many benefits to investors. For instance, because you own so many units with an apartment deal, you won’t be affected by a single vacancy like you would be with a residential investment property. These properties also offer the benefit of being scalable and generating significant cash flow. The cash flow opportunities that come with these types of properties make them especially valuable for those looking to generate passive income.
Commercial properties are also known for producing strong cash flow. You’ll also face less competition with shopping centers and office buildings than you would with residential properties due to the more complex nature of commercial property investments.
The good news is that many cities where returns are strong for homes also offer great returns for nonresidential properties.
How to Diversify Your Investment Portfolio Tip 3: Make a Variety of Business Connections
Conduct business with various developers and investors. This is a wise move because various experts might specialize in specific property types or markets. The more connections you have in the industry, the more likely you are to make smart investment choices that will lead to a strong, diverse portfolio.
Start Diversifying Your Real Estate Investment Portfolio Today!
Now is an ideal time to begin working on making your real estate investment portfolio more diverse. The great news is that you don’t have to go about managing your real estate investment portfolio on your own. Also, you can make your life easier by becoming a passive real estate investor.
Become a passive investor and master the art and science of diversifying your investment portfolio. Get in touch with me today to learn more about how to shield yourself against future economic downturns and grow your profits with the right real estate diversification strategy today.