In the world of investing, it is vital to diversify. That is just as true when it comes to establishing a real estate portfolio. Despite the relative certainty behind most real estate investments, it is anything but a guarantee.
Which is why diversifying becomes crucial. If you are wondering how and why you need to diversify, this is the guide for you.
Diversify by Asset Type
The first way to diversify is looking at the variety of asset types. Because there are so many options – large apartment complexes, small multifamily units, single family homes – there is potential value in diversifying into other asset types.
By putting all of your eggs in one basket, a change in the market could mean losing your entire portfolio. By getting into the industrial, commercial, retail, residential, and office spaces, you can gain access to greater diversity and keep yourself insulated from stark market changes.
Diversify by Location
It is important to remember that real estate is actually very hyperlocal. That means that while one city may be in a boom, the next town over may be in a slowdown. With diversification across locations, it means taking advantage of the various ups and downs that the market projects.
By investing in a single market, it means riding the highs and lows of that market. By hedging bets and having investments across multiple markets, it can mean insulating against a stark loss in one area by riding a high in another.
Diversify by Strategy
Another excellent way of diversifying a real estate portfolio is to change up your hold time and investment strategy. Maybe one rental property is a buy and hold while another is fit for rehabbing, renting out, and refinancing.
Again, diversification here is crucial because it is a great way to hedge against downturn. Perhaps holding on certain properties means having a shorter horizon. On other properties, it may mean holding for a longer time or even passing them down if you have kids.