By diversifying your real estate portfolio, you can minimize your risk and benefit from higher returns on your investments, as you are not dependent on a market’s highs and lows.
In this blog, we will discuss how to build a diverse real estate portfolio using four ways to diversify your investments. Furthermore, you’ll discover how to balance diversification’s benefits with its risks.
1. Diversifying your Portfolio by Geography
Diversifying your portfolio by geography is a key component for many investors.
Which geographical factors are involved?
An investment in property is greatly affected by its location in terms of potential returns and risks. Consider targeting different neighborhoods, cities, states, and regions. When it comes to choosing a location in which to place your diversified investments, each region has its own advantages and disadvantages.
Locating businesses in primary, secondary, and tertiary markets can help diversify your real estate portfolio.
Moreover, some areas are more suitable for certain sectors than others. Consider the market where your asset type is most profitable.
2. Creating an Asset Class-based Diversified Portfolio
Diversifying your portfolio with different asset classes is also a way to diversify your commercial real estate holdings. Through investing in different asset classes, you can increase the likelihood of gaining above-average returns as well as ride out the highs and lows of each market.
It is important to weigh the pros and cons of each asset class.
Multifamily real estate, for instance, is particularly hot at the moment. Multifamily properties provide lucrative investment opportunities, particularly in Opportunity Zones where the returns can be accelerated.
The industrial real estate market is experiencing a boom as well. With the rise of e-commerce and online shopping, warehouses and big-box spaces are more in demand.
The diversification of your portfolio can also include office space, retail, and mixed-use properties.
3. Developing a diversified portfolio based on your risk profile
Portfolios made up of different asset types that carry different levels of risk help you balance dependable, low-risk, low-maintenance properties and provide lower returns with high-risk, more demanding properties that promise more returns.
4. Investing in REITs can help you diversify your portfolio
You can also diversify your real estate portfolio by investing in REITs.
Real estate investment trusts (REITs) are corporations that own or finance income-producing commercial real estate.
REITs are subject to volatility in their share prices and come with a degree of risk, but they also offer you the chance to earn substantial returns on investment for minimal effort as property management is taken care of.
Furthermore, you can reduce the risks associated with solely relying on REIT investments by combining them with property investments of your own.
The Risks of Diversifying Your Portfolio
You can minimize risk and enjoy high returns on your real estate portfolio by diversifying your portfolio. In addition to diversification benefits, diversified investments also carry with them a number of pitfalls.
It is essential that you thoroughly understand several different markets and locations, as well as property managers if you plan on having a diversified portfolio.
Investing in multiple diversified markets will present you with a new set of challenges in terms of knowledge and competency. By working with a limited number of assets, you will gain expertise in your chosen markets quickly and avoid the time-consuming task of learning a whole new trade area.
Further, dealing with a team unfamiliar to you can cause unexpected problems. You might find that owning a problem property drains your energy and time, and affects your ability to manage your other properties.
Prashant Kumar, CCIM
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