Real estate investing is one of the most lucrative ventures you can engage in. The rewards are plenty and the possibilities are endless.
There are many reasons why you would want to take on this endeavor.
It can skyrocket your net worth, it’s great protection against inflation, it has many tax benefits, and it can help create a sizable nest egg allowing you to retire early (if you choose to).
Building your real estate investment portfolio becomes very attractive once you realize what the possibilities are.
In this post, we will cover 15 tips to help you create a diversified portfolio.
1. Diversification
Similar to investing in the stock market, you want to spread your assets out so that you don’t have all your eggs in one basket. The reason for this is protection.
Continuing with the stock market analogy: If your portfolio is well-balanced over a variety of stocks, bonds, etc. And one of them happens to take a nosedive, what would that do to the rest of your portfolio? Not much.
The effect would be cushioned because of the other investments you have that are keeping your portfolio afloat.
You can do the same thing in real estate by buying properties in several locations.
This strategy curbs your exposure to any risks that may be present in a particular market at the time.
Markets are known to shift quickly and oftentimes–without notice. When buying real estate, it’s important to be aware of and to plan for this contingency.
The way to take the edge off of this kind of impact is by investing in many areas that have different attributes and trademarks to them.
2. Take Advantage of Different Kinds of Investment Properties
Another good strategy to build your real estate investment portfolio is to invest in a variety of different properties. A quality portfolio will be well-diversified in this regard.
Commercial, residential, single-family homes, multi-family homes, duplexes, apartments, etc.
All of these different kinds of properties go through periods and phases of enhanced and deflated home value.
And by having all of them make up a portion of your portfolio, you’ll be able to better traverse through the shifts that come with their growth and shrinking cycles.
Also, be sure to think bigger than just one aspect of the real estate market. If you’re currently only investing in commercial properties, consider dipping into some residential areas–and vice versa.
This will add to your diversification and build a stronger portfolio. You could dive into retail, industrial, mixed-use, office, etc.
The idea is to safeguard your real estate portfolio by not being solely reliant on one or two properties, as changes and shifts can happen at any time and when you least expect it
3. Make a Real Estate Investment Portfolio Suited to Your Risk Tolerance
There are countless advantages of real estate investing. But, that doesn’t mean that it comes without its drawbacks. Real estate is risky and you should know where the pitfalls are.
With that in mind, it’s a wise choice to do all that you to reduce the risk and enhance your return on investment as much as possible.
To ensure this outcome, it’s crucial to understand the four categories of risk and reward for when you’re buying real estate.
Core
These are the most cautious and safeguarded assets to begin investing in. In general, core properties are fairly secure estates typically found in major metropolitan areas.
They are usually comprised of office towers, as well as high-rise and apartment buildings in the midtown sections of cities like New York, L.A., Chicago, etc.
Most of the time, they are high-class and upscale properties in the best areas. They have secure residency and quality occupants.
Core-Plus
Core-plus assets are like core assets except for a couple of distinctions that make them a bit riskier. Number one; the buildings are somewhat older and in a more rundown condition.
And number two; the occupants usually aren’t as creditworthy.
With these investments, you can expect to see 10% to 15% as a sensible return.
Value-Added
This is where the risk level begins to intensify. Value-added assets usually need a great deal of work before they can be profitable.
If the purchaser has a good business plan in place to attract new tenants, the owner has the potential to make a significant profit.
If done properly, these investments can yield profits as high as 20%.
Opportunistic
These are the highest risk properties. These investments usually have drastic turnaround circumstances such as chronic vacancy, construction problems, and are usually in uninhabitable conditions.
A major change is needed and if you’re able to pull it off, the returns from an opportunistic property can sometimes be as high as 70%.
4. Try a Variety of Real Estate Investment Plans
When building a diversified portfolio, it’s good to try different plans and strategies. You should have a blend of both short-term and long-term investments.
You can buy and hold certain properties as a long-term strategy to gain some equity. And you can also put in place a short-term strategy to realize some quick profits.
Both of these tactics will help keep your portfolio balanced when the market goes through volatile shifts.
5. Be Mindful of High-Interest Rates
Currently, borrowing money can be done at a low cost in 2021. But the interest of investment properties is usually higher than the interest rate of a mortgage. This is something to be very leery of.
Because if you choose the financing option for your investment property, you need a reduced mortgage rate so that it won’t cut into your profits.
6. Sole Ownership
One of the main reasons people buy real estate property is for the control that they gain as a result of the purchase. They have all the power when it comes to operations, finances, decision-making, etc.
This level of sole ownership is what gives you the freedom to pick your asset class, your location, as well as the degree of risk that you’re comfortable with.
You can choose your tenants as well as the rent prices and term lease.
And the best way to diversify your investment portfolio using sole ownership is to buy a mixed-use asset (offices in a storefront, residential arrangements, etc.)
This plan of action will help to reduce the risks that come with a single occupant or industry.
7. Marketplace Lending Asset Allocation
Investing in real estate has changed in recent years. And a big reason for this shift is due to marketplace lending.
Prior to this platform, if you wanted to invest in various properties, but didn’t have the financial resources, your only option would have been a REIT (Real Estate Investment Trust).
Purchasing shares in a REIT would have given you access to a variety of investment properties that you wouldn’t have had entry to before.
Individual investors had no power in deciding which properties went into the REIT portfolio.
But, marketplace lending permitted developers to register for loans and divide the cost of the subsidy across the pool of investors. This gave them the power to decide which properties they wanted to start investing in.
If you want to invest in real estate, you can use marketplace lending platforms to build and diversify your portfolio without any upfront costs.
8. Use Asset Type to Diversify
The myriad of asset types that are available to you is one of the main factors that makes real estate investing so special and unique. There are a variety of directions to go in using this method.
Think of everything from single-family homes to retail and office space to big apartment complexes, etc.
9. Use Geographical Location to Diversify
This strategy gives you a birds-eye view of the bigger picture. You can see how markets are doing in various towns and cities, and adjust your strategy to counteract the shifts in the market.
This allows you to maintain a well-diversified and balanced portfolio that is unaffected by the ups and downs of the economy.
For example, if you have all of your investments tied up in Miami, and something shifted within that market, you would be in trouble. But if you also had holdings in Tampa Bay, Houston, and Atlanta, well then it would be a different story, wouldn’t it?
Market fluctuations would not hit you nearly as hard.
If you’re looking to diversify in different locations, be sure to look at places that have a robust population and job growth, as this is a good indicator that your location is heading in the direction of continued growth.
10. Use Strategy and Hold Time to Diversify
A well-diversified portfolio often requires a switch in strategy as well as hold time. There are certain properties you may want to buy and hold while others you might decide to opt for the BRRRR approach (buy, rehab, refinance, rent, repeat).
When it comes to hold time, you may have a smaller window of opportunity, and as a result, decide to sell in 6 months to a year.
You may also decide to sell due to volatile market changes or simply based on your current strategy for that specific property.
11. Active Vs Passive Investing For Diversifying
When you allow for a blend of both active properties and passive group investments, you can have an incredibly diversified investment portfolio.
Rental properties such as residential homes are smaller while passive investments are usually bigger spaces like an apartment or office building.
When you have your rentals, you’re the one who handles the details such as assets or business plans. But with a passive group, you can utilize the experience of professionals.
This can bring in new tactics as well as markets to your portfolio.
12. Real Estate Funds
Another option to is invest in a real estate fund, funds come in all shapes and sizes. A REIT is a business establishment that retains and handles a portfolio of real estate.
Rather than you purchasing the real estate yourself, you receive shares of a fund that possess the real estate.
Real estate funds are great because they permit you to purchase a share of a bigger portfolio.
13. REITs
REITs are managed by a group of professionals. The properties that they purchase are qualified by investors who are well acquainted with the real estate industry.
Think of these professionals as your team that is trying to help you get the best ROI possible.
REITs also provide a very hands-off approach to your real estate portfolio. You can enjoy the advantages of property managers doing all the heavy lifting for you.
A chosen team handles rent collection, as well as the maintenance and management of the building.
And all you have to do is collect your returns.
14. Stay Clear of High-Risk Assets
Every real estate investment comes with risk. Some come with more risk than others, but every investment carries with it a probability of failure.
But everything being considered, there are assets out there that carry considerably more risk and that should be avoided if you’re looking to minimize your downside risk as much as possible.
Some of these include hotels, senior housing, lodging properties, and real estate that is used in the manufacturing of oil and gas.
For instance, the hospitality industry has been severely hit due to the pandemic of 2020. In this case, the quality level of hotel performance has fallen tremendously.
This is something to be aware of as it pertains to property functionality in other industries.
15. Private Real Estate Syndication
Private real estate syndication is another way to diversify your real estate portfolio. This type of investment is where certain groups merge their funds to gain a property of a variety of properties with similar traits such as location.
A tax-sheltered, passive investment; private real estate syndication can add a sense of stability to your portfolio.
This is also due to the fact that it’s a fence against inflation. Inflation robs the value of your money, but this investment maintains (and enhances) its value as time goes on.
Your Portfolio, Your Choice
The tips provided in this article should give you some ideas of how to best strengthen your real estate investment portfolio. Use the ones that are most applicable to your situation.
If you still have questions that you would like answered, get in touch with us. We’re glad to help and look forward to hearing from you.
