Diversification through real estate

Diversification through real estate

Whether you’re investing in stocks or real estate, you’ll undoubtedly hear a lot about the importance of a broad portfolio. Diversification is an investment strategy, defined as the mixture of a variety of investments within an investment portfolio. Diversification aims to spread out investments across different asset classes, sectors, and strategies. As a result, a downturn in one area is less likely to affect the entire portfolio. One of the best methods to limit risks and drive long-term profits in real estate investing is to diversify your portfolio. In this article, we will discuss some of the main concepts of investment diversification through real estate.

What is diversification?

Diversification is a practice in which you invest in different types of assets or securities. Diversifying your portfolio fundamentally means spreading your investments across a wide range of assets and industries. Diversification offers two major benefits:

  • Your investments are better protected.
  • There’s a better chance that your portfolio will increase in value.

Diversification through real estate

Diversification is a key part of investing as it reduces the volatility and risk of loss in an investment portfolio over the long run. In the long run, a diversified investment portfolio outperforms a non-diversified portfolio in terms of risk-adjusted returns. Because real estate has a low connection with traditional equity investments, it is an excellent way for investors to diversify their assets. Real estate investing tends to be a much steadier investment and is backed by a physical asset. Therefore, it is much more difficult for your investment to disappear into thin air.

How to diversify within real estate investments

Let’s look at the top five techniques to diversify your real estate portfolio and protect your investments.

1. Diversifying by asset type

One of the things that make real estate investing so distinctive is the range of asset types available. You can choose from single-family houses to modest multi-family buildings to major apartment complexes to invest in. You can also invest in retail, industrial, office space, self-storage, and more.

2. Diversifying by geographical location

Real estate is hyperlocal, meaning that while one area might be booming, another area 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 also hedge your bets against a major correction in any one market. Look for markets with substantial job growth, population growth, and job diversity when diversifying across geographies. This will assure that the market you’re investing in will continue to grow strongly in the years ahead.

3. 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, people like to rent larger, more luxurious properties in nicer areas during boom times. In difficult times, people may need to downsize, find more affordable properties. There are asset classes that fare well in good times, and asset classes that fare well in bad times. As such, it’s important to diversify across asset classes, to ensure your portfolio is profitable in all parts of the market cycle.

4. Diversifying by strategy and hold time

Another great way to diversify your portfolio is to change up your investment strategy and hold time. Even within a single geographical market, diversifying by investment strategy could be a useful method to protect against a slump. In terms of hold time, due to market conditions or your investment strategy for particular properties, you may have a shorter horizon and expect to sell in a year or two.

5. Diversifying by active vs passive investing

Finally, incorporating a mix of active rental properties and passive real estate group investments can be a great way to diversify your portfolio. Passive syndication investments are typically larger commercial assets like flat buildings, whereas rental investments are typically smaller residential properties.

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