Investing in Real Estate? Be Sure to Diversify.
You’ve likely heard the saying, don’t put all your eggs in one basket. Doing so puts you at risk of losing everything all at once. That’s the basic premise behind diversifying which is applicable to all types of investments, including real estate.
By diversifying your real estate portfolio:
- Your total investment is better protected
- Your risk is lowered and often backed with a physical asset
- You can create a steady flow of cash and consistent returns
- You’ll have the best chance of growing your wealth
- You are more likely to enjoy long-term stability
If you’re just getting started, start small. Get a feel for it and if real estate is an area where you feel comfortable investing. You don’t even need to buy a property to get your foot in the door.
One interesting option is a real estate investment trust (REIT) which pools capital from multiple investors to buy, sell and operate income-producing properties.
Diversify by Type
Because real estate is cyclical, different types of properties perform better or worse based on the timing, local and regional market trends, as well as the broader economy. With a diversified portfolio, you can hedge against major fluctuations and potential losses.
For example, if you invested all your money into office buildings three years ago, it’s likely that you would’ve seen a major drop in the value of your portfolio when the pandemic moved entire companies from physical spaces to remote-based work environments.
And if you only invested in home flipping, the recent interest rate hikes would likely be slowing your ability to sell quickly and get multiple, over-ask offers.
Consider single-family homes, duplexes, and other multi-family properties that you can rent out for a profit. Look for fixers that can be renovated and sold or rented. Invest in retail space, land, industrial, office space, self-storage units, vacation rentals and more.
Don’t forget those REITs, stocks, mutual funds and other passive investment options.
Diversify Strategy and Hold Times
Some investors want big payouts with minimal hold time—others want consistent, ongoing cash flow every month. The true planners are investing now, holding and selling later to pay for their children to attend college. While these are all excellent goals, diversifying reduces risk.
Even if you start small in one area or with one goal in mind, it’s always a good idea to reinvest in different areas of the real estate market.
You can buy and rent out a duplex in an up-and-coming neighborhood, then sell for a profit once the market takes off in a few years. In the meanwhile, you can then use that income to update a flip purchase that you plan to sell in a month or two.
You can also put money into REITs which pay out monthly or quarterly dividends. You can hold onto those for however long you want and liquidate them easily, unlike trying to sell a property which can take weeks or months.
Quick tip. Don’t forget to talk with a financial advisor regarding your plans so that you can better understand your potential tax liabilities based on your strategies and projected hold times.
Diversify by Location
This doesn’t necessarily mean you have to look at real estate properties in other states, though you can absolutely expand if you want. All you need to know is that real estate is hyper-local. In Denver, there are 78 official neighborhoods and each varies when it comes to property values.
So, if you want to stay within the Denver metro area, don’t put all your eggs in Central Park, or RiNo, or Athmar Park. Diversifying allows you to take advantage of market ups and downs and reduce your risk. It’s all about hedging your bets, especially if you are risk averse.
Just be sure to do the research. Work with a real estate professional who can help you.
On your own, you can review statistics reports from the National Association of Realtors. Look for indicators such as population and job growth. Learn about schools, amenities, roadways for commuting—anything that might contribute to or hinder the value of your investment.
Diversify by Overall Risk
Any type of investment, real estate or otherwise, comes with various levels of risk. Being able to identify high-risk investments can help to ensure that you don’t over-commit capital to areas that are speculative or require a lengthy hold time before producing a profit.
For example, as you expand your real estate portfolio, you should have both easily liquidated and long-term investments. Acquire properties that are in demand such as rentals and those that might rely on business growth or tourism. Invest in the next up-and-coming neighborhood and one where values have consistently increased over time.
Then there’s the asset itself. If you want to flip homes or take on renovating a small apartment complex before renting out units, make sure you have other properties producing consistent (and enough) revenue to fund your fixers. It’s all about balance.
Happy investing and feel free to reach out to one of our agents for help from a local expert.