How Real Estate Investors Can Diversify Their Portfolio
Diversification is one of the most important strategies in minimizing investment risk. Even real estate, touted as one of the best investments, needs to belong in a well-diversified portfolio.
This strategy involves spreading out risk by investing in different assets that ideally don’t correlate with each other.
For example, gold tends to do well during a financial downturn while stocks do not. Even if a recession causes stock prices to drop, you can offset some of that loss with assets that perform well in similar market conditions.
Investing in different assets — property, security, commodities, and cash to name a few — can help minimize the risks of volatility in your portfolio overtime. If this seems interesting, read below for a few tips on how real estate investors can diversify their portfolio to keep their exposure at low risk.
Invest in multi-dwelling units
Multi-family residential properties, also called multi-dwelling units, are the real estate investor’s most stable source of income. Even during economic stability, the multi-family residential segment tends to perform well.
People might not need office or retail spaces but they will always need housing. That’s why every real estate investor should have the majority of their assets allocated toward this type of property for a steady stream of cash.
Consider vacation rentals
Experts are reminding investors that pandemics don’t last forever and travel restrictions will eventually ease. When that happens, hordes of travel-hungry people will be looking for short-term rentals. In fact, vacation properties have already been seeing a spike in demand as of late.
Individuals, couples, families, and groups are looking for safe getaways without having to worry about social distancing and other safety protocols. Short-term rentals can be very lucrative for properties adjacent to vacation spots and important landmarks.
Expand into commercial properties
Commercial properties might not be doing so hot right now but to echo the aforementioned sentiment: the pandemic is not going to last forever. People will start dining out, shopping, and going back to offices. If you’re an investor with experience and capital, you might want to consider earmarking some of it for commercial spaces.
Earn a passive income from REITs
Real estate investment trusts or REITs are perfect for investors who want exposure to the real estate market without the responsibility of property management. REITs collect money from individual investors and pool them into income-generating real estate properties such as apartment buildings, hotels, and offices.
Buying REIT shares is done through a broker. Then, you earn a cut of the money that the property generates. It’s a great way to earn a passive income from real estate without purchasing or managing the property itself.
Diversify with other asset classes
Even if your real estate investment portfolio is diversified, it’s not diversified well enough if all of your holdings are in real estate.
You need other asset classes. An easy way to start is to open a brokerage account which you can use to invest or trade different types of securities, such as stocks, ETFs, and bonds. The good thing about brokerage accounts is that they can be opened online. Investors of different levels can easily access and manage their portfolio whenever and wherever they are. Compared to real estate, these assets are also liquid and can be converted into cash easily if needed.
Although it is one of the oldest rules in the investor’s handbook, diversification is still very much worth following and applying today. Building a real estate portfolio from scratch is not without its challenges and risks but you can protect your portfolio and, in turn, your financial security with these key diversification tips.