Diversifying your real estate portfolio

Diversifying your real estate portfolio

Whether or not you have money invested in the stock market, you’re likely well aware of the roller coaster ride of stock market investing. Real estate, on the other hand, is a far more stable investment that is backed by a physical asset. This makes it much more difficult for your investment to disappear into thin air. Despite the advantages and generally lower risks associated with real estate investing, not all real estate investments are made equal. Diversifying your real estate portfolio across diverse asset classes, asset kinds, and regional markets to reduce overall portfolio risk and assure continued and stable growth.

The importance of diversifying your real estate portfolio

Diversification is one of the most effective tactics for maximising your portfolio’s long-term growth. You can even diversify your real estate portfolio without diversifying into other assets. You can reduce your overall risk and boost your chances of higher long-term profits by investing in a mix of real estate assets.

Here are some ways to diversify your real estate portfolio, so you can protect your investments.

Diversifying by asset type

The variety of different asset types is one of the things that make real estate investing such a unique investment. You can choose to invest in everything from single-family homes to small multifamily properties, to large apartment complexes. You can invest in retail, industrial, office space, self-storage, and more. You can protect yourself from broader macroeconomic changes by diversifying your real estate portfolio.

Diversifying by geographical location

Real estate is hyperlocal, meaning that while one city might be booming, a neighbouring town might be experiencing a slowdown. By diversifying across different geographies, you can take advantage of the ups and downs of various markets. Moreover, you can hedge your investments against a major correction in any one market. When diversifying across different geographies, look for markets with high job growth, population growth, and job diversity. This will ensure that the market you’re investing in is on the path to strong growth in the coming years.

Diversifying by asset class

When diversifying across asset classes, it’s important to understand a bit of human behaviour during booms and busts. For example, in good times people tend to rent bigger and more luxurious apartments in nicer areas. In tough times, they might need to downsize, find a more moderately priced apartment, or move across town. There are asset classes that fare well in good times, and asset classes that fare well in bad times. Because real estate is cyclical, it’s important to diversify across asset classes, to ensure your portfolio is profitable in all parts of the market cycle.

Diversifying by strategy and hold time

Another great way to diversify your portfolio is to change up your investment strategy and hold time. Diversifying by investment strategy, even within a single geographical market, could be a good way to hedge against a downturn. As for hold time, perhaps you have a shorter horizon on certain properties and might sell soon. For other properties, maybe you have a longer horizon and anticipate holding those for many years or even passing those down to the next generation.

Diversifying by active vs. passive investing

Finally, introducing a mix of active rental properties and passive real estate group investments can be a great way to diversify your portfolio. Whereas rental investments tend to be smaller residential properties, passive group investments tend to be larger commercial properties like apartment buildings.

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