A staggering 90% of the world’s millionaires created their wealth through real estate investments. Now, apart from being millionaires, the one thing these people have in common is that they have diversified properties. If you want to thrive in real estate as an investment, you must strive to diversify your real estate investment portfolio.
What makes diversification such an effective real estate investment strategy? The fact that you spread your investments across different sectors, property types, and asset classes. What makes diversification so important?
Read on to find out why diversification should be the goal of every real estate investor and how you can grow your portfolio.
Real Estate Diversification Benefits
Creating a diversified real estate portfolio is the most effective way to thrive in the real estate business. You can achieve financial freedom and gain massive amounts of wealth.
Apart from generating high returns, it’s the best way to protect yourself against abrupt market downturns. You see, the real estate market can be quite volatile. Even the strongest of portfolios experience losses every now and then.
When you diversify properties, you mitigate these losses. A robust diversification strategy maximizes risk adjustment returns. You need to choose investment options that offer you high returns at the risk level most acceptable to you as the investor.
This makes it imperative for you to assess your risk tolerance levels. Do it before you decide your real estate portfolio allocation.
How To Invest in Diversified Properties
There are disparate ways to invest in diversified properties. Each one of them requires different capital, time commitments, and level of expertise. Whether you want to indulge in short-term or long-term investment strategies also matters a lot.
Let’s break down real estate investing into active and passive investing first.
Active Real Estate Investing
Active real estate investing means being directly involved in the investment process. It requires your time, capital, and risk. You need to be engaged in the process, like during acquisition, renovations, or managing rental properties.
Managing rental property, for instance, is an active investment if you opt to self-manage. Self-management means that you’ll be involved in leasing and vetting your tenants. You’ll also handle rental property issues like collecting rent and maintenance.
The return potential falls under rental income or property appreciation. The one thing you should know about active real estate investment is that they demand large capital commitments upfront. For instance, when you buy rental properties, you’ll have to put in a down payment and mortgage.
Both will be tied to the property for the duration of the investment. You can only access your principal and appreciation only when you sell the property. That said, investing in income properties is a sound investment strategy, especially for the long haul.
If you’re not looking for long-term investment properties then, opt for house flipping. It’s also a common active investment strategy. It involves purchasing run-down properties, renovating them, then selling them at a higher price.
Passive Real Estate Investing
Passive real estate investing is a great way to generate passive income through real estate. What makes real estate properties passive is the fact that you’re not directly involved.
Some of the most common passive real estate investments include real estate funds and REITs. You may also have heard of syndications and crowdfunding opportunities.
When you choose passive investing, you dispense capital and allow other professionals to invest on your behalf. With this arrangement, you’ll only be responsible for your investments alone. You’ll eliminate all the additional liabilities associated with active investing.
Passive real estate investments offer more options when it comes to diversified properties. They have greater diversification potential and can hold debt investments. These can also earn you returns in the long run.
One of the best things about passive real estate investments is that they demand less investment minimums. This essentially means investors of all sizes can invest in a variety of options.
Let’s dig deeper into how you can diversify your real estate investments, shall we?
How To Diversify Your Portfolio
When building a portfolio of diversified properties, your main focus should be on spreading out risk. This involves allocating your real estate investments across multiple categories.
Let’s discuss some of the options you should explore for a truly diversified portfolio.
Diversify Your Portfolio By Location
Diversifying your real estate portfolio by location is by far the simplest strategy. It involves purchasing properties in multiple locations. This limits your exposure to risks inherent in a particular area and real estate market.
Invest in different regions that have different qualities and features. It’ll reduce the impact of sudden market shifts. Consider long-distance real estate investing as well.
This involves investing in different cities and different counties. Additionally, invest in neighborhoods with varying economic standing. It’s easier to capitalize on upward trends within the local housing market.
Diversify Your Portfolio By Property Type
Apart from location, you should also diversify your real estate investment portfolio by property type. Invest in a wide range of properties going from single-family homes to multi-family homes, apartments, and condos. With time, you can diversify further by looking into commercial and industrial properties.
As a beginner in real estate investing, you should opt for single-family homes and similar residential properties. With time, you can move onto condos, apartments.
Once you’re well versed in the real estate industry and understand the market, you can invest in more luxury condos. From there, consider retail, offices, commercial, and industrial properties.
Diversify Your Portfolio Based on Risk Levels
In any type of investment, risks are inherent, and the bigger the risk, the bigger the reward. However, you must mitigate that risk without the possibility of running your investments into the ground. This means that you should spread your investments across all levels of risk.
There are four main risk profiles when it comes to real estate investments. The first profile is the CORE, which are standard income properties located in a stable real estate market. However, their returns are average at best.
The second profile is the CORE PLUS, where assets boost more features and risks are slightly higher. The third profile is VALUE-ADDED. Properties within this range need more work before they can make you profit.
You need a good business plan to boost occupancy. You may also need to carry out some improvements and repairs to improve the condition of the properties. However, they can yield you as much as 20% in returns.
The last risk profile is OPPORTUNISTIC, and properties in this range come with huge risks. These involve distressed properties that are in a bad financial situation.
They require a considerable turnaround to generate profits. If you get it right, these can give you over 20% in returns.
Diversify Your Portfolio Based on Different Strategies
Acquiring real estate investments that pay requires using different investment strategies. This is the key to having diversified properties. Consider having long-term and short-term investments.
You can opt for long-term investment strategies such as buy-and-hold, which allows you to build equity. Alternatively, if you opt for short-term strategies, then you’ll be able to reap quick returns.
Even better, you can protect your investment from uncertain market cycles. Beyond this, you should also consider rental strategies for income generating real estate investment.
Consider acquiring long-term rental properties to get the most of the rental market. However, opt for short-term rental properties as well. Think in the lines of Airbnb properties or similar short-term properties.
Where Do You Start
Now that you know how to get diversified properties, where do you start as a beginner?
The first thing you have to do is set clear goals and have a solid investment strategy. Now, the whole point of building an impeccable real estate portfolio is to achieve your financial goals.
Determine what you would like to achieve and how reliable of an income you are looking to create. Investing in income properties is one of the best strategies.
Still, you need to decide whether you want to pay your bills or you want financial freedom. If you’re a beginner, start with one investment strategy. Find something that works, then diversify as you understand the market.
Create Your Business Plan
Just like starting a business, investing in real estate requires a solid business plan. Creating a business plan will help you concentrate on specific short-term goals that will take you closer to your long-term goals.
In your business plan, define how you intend to achieve those goals and where you intend to get your finances. Include how you intend to acquire and manage your first property and whether you want partners.
Real Estate Investment Diversification: How to Acquire Diversified Properties
If you’re looking to get into real estate investment, one of the best things you can do is diversify your portfolio. This may not be easy, but if you’re determined enough, you can start small and grow your portfolio.
If you’re a beginner, start with single-family homes and similar diversified properties. Later on, venture out to condos, apartments, as well as commercial properties.
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