Rohan MathawanWhen it comes to investment portfolios, there’s always a right time and right way to diversify. That applies to all portfolios, including real estate. If you currently invest in the stock market, you know about the ups and downs over the past several months. For some, money grew quickly and steadily, only for it to disappear overnight.
While some investments come with big risks, real estate is one that typically remains steady. The reason is it has a physical asset attached. So, having money diminish or disappear altogether isn’t nearly as plausible compared to other investment types.
Even with notable benefits and lower risks, you still need to choose the right real estate investments at the optimum time. After all, some can yield incredible results, while others could put your entire portfolio at risk.
To reduce the possibility of something going wrong and experience steady growth, you want to diversify your portfolio. For this, diversification should go across various asset classes and types, as well as geographical markets, plus more.
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Why You Want to Diversify
Unfortunately, no one has a crystal ball to know what the future holds and when the economy will change. However, using historical data, you can get a better handle on what could happen. Remember, recessions and corrections occur in cycles. So, when in a recession, recovery is eventually on the horizon. This is when you want to hedge your bets, get ready to go on a bumpy ride and invest to achieve long-term growth.
Among the various strategies that investors use to maximize long-term growth is portfolio diversification. You can diversify using the real estate market or look at other investments, such as cryptocurrency, stocks, and so on. Investing in several real estate assets accomplishes two things. It reduces risk and increases the chance of higher returns over a longer period.
Protecting Your Investments
To diversify your real estate portfolio, consider these five options:
1. Diversification – Type of Asset
One reason a real estate portfolio is unique is that you can invest in different asset types. Examples include multi-family properties, large apartment complexes, single-family homes, self-storage facilities, retail spaces, industrial offices, and the list goes on.
Regardless of the asset type, you can make money. This type of investing gives you a hedge against more significant macroeconomic changes. For instance, companies now allow employees to work from home as opposed to a typical office space. This is also happening with retail as an increasing number of companies focus more on e-commerce than using a retail store.
2. Diversification – Geographical Location
Another way to get the most from your real estate portfolio is to diversify across various geographic locations. This can help tremendously. After all, one city might be in the middle of a huge growth period, while another is barely staying alive. That allows you to take advantage of the markets with growth while avoiding those slowing down.
Putting all your real estate holdings in a single market is risky. If that market goes through a bad economic period, it could cause major problems for your entire portfolio. However, investing in several geographical markets would reduce any potential for damage.
3. Diversification – Asset Class
There’s also the asset class to think about. Remember that during economic highs and lows, people’s behavior changes. For instance, when the economy is good, a lot of people will spend more money to live in a luxurious and spacious apartment located in a prime part of the city. In comparison, when the economy is bad, most will move elsewhere or downsize.
Just as with geographical locations, some asset classes do well while others don’t. With no clue as to when another recession will hit, keep your portfolio profitable by diversifying across different asset classes.
4. Diversification – Strategy/Hold Time
In this case, you would diversify your real estate portfolio based on the investment strategy used, as well as hold time. For instance, if you invest in rental property, one location could be a buy-and-hold. However, another location might be a better fit for buy, rehab, rent, refinance, and sell. One way to hedge against a down market is to diversify by strategy, even if that’s in one geographical market.
Then, there’s hold time to consider. This concerns properties you want to sell pretty quickly compared to those you want to hold onto for a couple of years. You might even have a property that you don’t plan to sell at all but rather pass on to family members.
5. Diversification – Active Versus Passive Investing
Another excellent way to diversify your portfolio is by investing in both rental and passive real estate. While rental investments consist of small apartments or houses, passive investments are typically large commercial properties. Examples include an apartment complex and shopping mall.
For the rental properties that you own, you can manage and plan the business without outside help. However, for passive investments, you’ll need professionals who can help.
Diversifying For Retirement
Once in retirement diversification is even more important. Nobody wants to run out of money in retirement and having a diversified portfolio, especially once with steady income, is key. Make sure you have a good retirement plan in place to see if you are diversified enough and will have enough retirement income. Hire a financial planner or use an online retirement software package to help you. This way you can have less stress in retirement knowing you can handle the ups and downs of the market while still having enough income for your expenses.
Summing It Up
Recessions are never fun; fortunately, they don’t last forever. As an investor, you want to take advantage of everything you can, whether it’s a strong or weak economy. These five tips are a great way to accomplish that.