Diversifying your real estate portfolio is the recommended strategy for ensuring that your assets stay profitable in all economic climates. When you diversify your property investment portfolio, you adhere to the age-old wisdom of not putting all your eggs in one basket.
This strategy helps inject stability into your investment efforts by limiting the adverse effects of negative events on one asset to that asset alone. There are many ways to diversify a real estate investment portfolio. In this post, Upkeep Media will be looking at three of them.
- Diversifying into residential and commercial real estate.
- Diversifying into cash flow properties and capital growth properties.
- Diversifying by investing in different locations.
Diversifying into residential and commercial real estate (CRE)
The first advantage of CRE over residential properties is you can quickly scale with commercial real estate. They are often easier to manage. For instance, you have to deal with multiple tenants in an apartment building, but in a commercial building that costs the same, you may only have two tenants.
Furthermore, the tenants in the commercial property will do a better job of looking after the property than the tenants in the residential building. Tenants in commercial properties also pay higher rents. The lease is longer, unlike residential property tenants who are likely to move at any time.
The effect is that the potential for value-add is very high with commercial real estate investment. The superior cash flow of the property also means you can scale your portfolio faster. But this is not to say there are no advantages to having a decent number of residential properties in your portfolio.
As we saw during the pandemic, commercial properties are sensitive to economic downturns. But while businesses may close shop during hard times, people will always need a place to live. Residential properties often have the edge over commercial real estate in harsh economic climates.
The other advantage of residential properties is they are a lot easier to buy than commercial properties. It is also easier to offload a residential property than sell a commercial property. For the best investment outcomes, you should have a selection of both CREs and residential properties.
Diversifying into cash flow and capital growth properties
Another way to diversify your property portfolio is to buy cash flow properties and real estate with potential for capital growth. Capital growth properties often have the ability to double their value every seven to ten years. That means you must hold it for years to reap the benefit of the investment.
The problem with capital growth properties is they may not provide the cash flow to invest in other assets while waiting for the asset to double its value. In order to buy more of those kinds of properties, you will have to dip your hands into your pocket.
But with cash flow properties, you do not have this problem. Cash flow properties offer regular income you can reinvest to buy more real estate and grow your portfolio quickly. What they lack in capital gains, they make up for it with consistent cash flow.
The difference between the two kinds of investment properties is cash flow properties start to produce small returns from the get-go. Capital growth properties promise a massive payday seven or ten years later. It is better to have both of these property types in your portfolio.
Real estate diversification by investing in different regions
Diversifying your portfolio by spreading your assets across different geographical regions ensures that investments are not as vulnerable to economic shocks. It also lets you take advantage of investment opportunities in markets other than your local real estate market.
When investing across geographical regions, you may decide to limit yourself to a specific area within your country, or you can invest in properties across the entire country. Also, you may elect to buy domestic real estate only or spread your nets to include international real estate investments.
Quite naturally, the farther afield you spread your investments, the more complicated the process of buying and managing those assets will be. While purchasing real estate investments that are not local to you, research must be a big part of your investment process.
Diversification by investing in multiple locations is a great way to scale your portfolio if you can make it work. It affords you the opportunity to invest in high-growth properties in different parts of the world. You can reap the economic benefits of buying in those places without leaving home.
In conclusion, these are not the only ways to diversify your property portfolio. You can also do it using various property investment strategies, such as buy-and-hold, REITs, or BRRRR (buy, rehab, rent, refinance, repeat). You may want to consult an expert to determine the best method.
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