Real Estate Diversification
Real estate has historically been one of the safest investment types by risk. It’s especially effective when you have a strategic real estate investment portfolio that has different asset classes in different locations. In fact, according to the Journal of Real Estate Research, diversifying your portfolio can reduce your risk by 60%-94% in both the U.S. and European markets.
This is why Marketplace Homes is prepared to assist investors with important decisions like how to diversify their real estate portfolio to minimize risk and maximize returns. There are many ways to diversify real estate. As a national full-service brokerage, we can easily get you into different geographical markets. Let’s dive a little deeper into this concept so that you can take the best route for your investments.
What is Real Estate Diversification?
Diversification is when a business varies or enlarges its products or field of operation. In real estate, diversification increases an investor’s chance of achieving long-term growth. For example, multifamily properties and single-family homes present unique opportunities in different markets. There are several ways to diversify your portfolio in real estate. Here’s what it can look like:
1. Portfolio diversification real estate by asset type.
This involves buying different types of properties that appeal to a variety of occupants, which strengthens your portfolio’s appeal. You can go as broad as categories (retail, residential, industrial, and commercial real estate) or as specific as building type, like Brownstone or one-level single-family homes. A diversified portfolio by real estate asset type can include:
- Commercial properties
- Single-Family Homes
- Multifamily Units
- Apartment complexes
- Office Space
- Restaurants
- Self-Storage Units
- Alternative investments from the stock market like REITS (Real Estate Investment Trusts)
- Benefits: Low-risk, easy to start, potential to earn dividends
By having different property types, individual investor can decrease the impact of market fluctuations. An entire portfolio going down at once can be detrimental to your business, while diversifying in terms of location makes you far less vulnerable to the winds of change.
2. Diversifying by price bracket.
Investing in properties at different price points is a wonderful investment strategy. It can ensure you have listings that are accessible to different buyers. Having an assortment of starter homes as well as move-up homes and apartments ensures that your portfolio is appealing to people with different income levels and circumstances.
Therefore, if one price point is in demand, like affordable residential real estate, you can rely on these types of assets to keep your rental income steady. Meanwhile, you can still market the costlier types of investments in your portfolio without worrying about them being your only source of income.
3. Diversify real estate by location.
Markets don’t always cycle uniformly, and you can even find a city booming in spite of a recession. If you put all your properties in one place, they will all have the same risk profile of that same market. Therefore, you won’t be victim to one market’s volatility.
However, if you invest in different locations, you can find that while one set of investments may be on hold for better days, you can sell high in another location – or even flip a property or two in another.
4. Diversify real estate by hold time.
Long-term rentals generate steady passive income, but if you switch up your holding times, you can play with different timelines and see which ones work for you. While one property may be an excellent investment decision for decades and beyond, you may buy and hold another for five years and sell.
5. Diversifying with active and group investments.
As a real estate investor, you may actively manage part of your portfolio with a property manager but then partake in group investments for high-maintenance properties like large commercial buildings or apartment complexes. Crowdfunding like this helps you take part in more high-risk ventures without being the sole owner.
Diversifying by Market with Investment Types by Risk in Mind
Since no two real estate markets are the same, you can take advantage of how different locations won’t have the exact market conditions. This means that you use different geographies to make decisions that benefit your financial profile.
For example, if you have assets in a downturn and there is little chance of a full recovery (such as a town with declining population or loss of major employers), it may be time to release properties in this area. There are also instances in which you can confidently invest.
Optimal Markets for Your Overall Portfolio:
1. Positive job growth:
Currently, areas like Memphis TN and Atlanta are experiencing steady growth due to the plentiful availability of jobs. When you see healthy builder activity as well as people flocking to the area for work, you can be confident that these people will need homes and places to set up business.
2. Positive population growth:
More people = more people who need leases and places to work. Since housing is a universal need, you can count on a higher population triggering more demand for homes.
3. Popular tourist spots:
Demand for luxe residential properties in desirable locations (such as near Disney World, ocean fronts in hot locations, etc.) generally remains steady. Just be sure to have a plan to offset costs during non-peak seasons.
4. Standard, affordable rental properties in stable locations:
Everyone needs a roof over their head, and if you provide affordable apartments or affordable single-family homes for rent, there will be interest in practically any market. People are always looking for the best deal, so keeping low-cost bracket properties in your portfolio helps you maintain cash flow.
Taking Advantage of Slowdowns
Slowdowns can also become an opportunity if you time your actions wisely. For example, a cooling market means lower prices. If you bet against the market recovering in your favor, then you can buy low with the potential for values rising in the future.
To assess risk vs. reward, it’s important to discuss any acquisition with your real estate agent to examine the property. Criteria examine would be its market, its trends, and upcoming developments. Who knows? Maybe this same slow market will be booming when other properties go flat in the future? This method will carefully examine your investment types by risk individually.
Real Estate Diversification: Tempering Investment Types by Risk
“Don’t put all your eggs in one basket” is valuable advice that can apply to a variety of situations, including real estate. Having alternative assets increases your investment opportunities and Marketplace Homes has seen many market cycles. We’ve seen markets go up and down since 2002, and we’re still here assisting a variety of clients with their real estate needs. If you want to learn more about diversifying your portfolio by geographical market, contact us today.