A recent survey of 2,200 American adults conducted by CNBC and Morning Consult revealed that 1 in 4 Americans have no idea whether their investments are diversified. Savvy investors understand the importance of a diversified investment portfolio because it lowers risks by spreading money across various investment types. Therefore, many investors rebalance their portfolios from time to time to ensure that they have invested across a wide range of industries and categories. However, it is crucial to diversify your real estate portfolio as well. Here are some of the best tips for diversifying your real estate investments.
- Diversify By Sectors
There are three main sectors in the real estate industry: residential, industrial, and commercial. Consequently, it makes sense to spread your investments across these categories to diversify your portfolio. Residential properties are for housing purposes and can range from a single unit to large apartment complexes. Single-family residential buildings and multi-family properties like duplexes and triplexes are smaller types of residential properties that can deliver significant returns to investors. However, larger residential real estate options like apartment complexes or condominiums are worth looking into if you have more funds to spare. Renters reportedly occupied about 36% of the country’s 122.8 million households in 2019. Therefore, you will enjoy a steady rental income due to the high demand for housing.
Commercial real estate like shopping malls and office buildings are used primarily for business and commercial purposes. They have a higher income potential than their residential counterparts, with yields usually between 5% and 10%, so having an office building or two in your portfolio is worth it. Industrial properties are also worth considering because they have higher rental rates and longer leases, making your investment more secure. It is somewhat challenging to achieve diversification with direct real estate investments, so syndication is a better way to accomplish this. Real estate syndicates easily allow you to feature the different real estate sectors in your portfolio. The team at Syndication Attorneys can assist real estate syndicate partners with a wide range of legal and non-legal services, so keep this in mind.
- Diversify By Geography
It may appear prudent to have your investment properties in one location since it will be convenient and potentially cheaper to manage them. However, the market in which your property is located impacts your portfolio’s diversification, so it is best to spread out your property investments. Smaller markets often attract fewer investors, while larger ones offer more diversification opportunities, even within one country or city. You can diversify your real estate portfolio by investing in other countries worldwide. Therefore, if something goes wrong with the American housing market, like in 2008, your investments in other countries will stabilize your portfolio and suffer fewer losses. Similarly, you can buy property in different cities and even in separate regions within these cities.
- Diversify By Investment Strategy
There are three main real estate investment strategies, and you can diversify your portfolio by including them all in it. A core real estate investment has the lowest risk profile and has a solid reputation for generating reliable and conservative returns. Properties in a core strategy are attractive, well-located, stabilized, and marketable; a good example would be an office center in the central business district of a bustling metropolitan area. Core real estate investment properties are usually in top-notch condition with great tenants and require few improvements. However, these properties rarely return a high profit when sold, so they are best for rental income only. You can also include value-add investments, typically higher in risk than their core counterparts because they often perform below their full potential and need significant maintenance or restorations to improve their quality. You may even need to change a value-add real estate investment building’s property managers if they are responsible for its poor performance.
After adding value to these properties, you can market to potential buyers and lease them out at higher rates. Although this strategy demands more effort than the core approach, you can enjoy significant returns through rental income and the property’s value appreciation. Last but not least, take advantage of opportunistic real estate investments. This strategy involves purchasing underperforming properties like undeveloped land or distressed assets at lower prices. You can then add value to the property and sell it at a significantly higher price. Most returns on properties acquired under the opportunistic strategy come through capital appreciation. Consequently, you can enjoy an internal rate of return (IRR) of more than 15%.