I recently attended the Mom 2.0 Conference in Austin, TX, where one of the sponsors was WaterWipes. They were giving away packets of individual wet wipes. For the parents out there, you know how incredibly valuable wipes can be, especially in unexpected moments of vomit/poop/snot/crumbs/sand/paint/etc.
So what did I do? I hoarded as many of these individual wipes as I could, and once I got home, I put a few everywhere. In the car, in my to-go bag, in the kids’ backpacks, in the kitchen, between the couch cushions… You name the place, and I could probably reach a wipe without standing up.
The purpose, of course, was to prepare for those unexpected moments. You don’t know what they’ll be, or when they’ll happen, but you know they’re coming.
Diversifying Your Real Estate Portfolio
It’s important to do the same thing for your real estate portfolio. We don’t know what will happen in the future, or when, but based on historical data, we know that corrections and recession happen in cycles, so if we’re not in one now, one will be coming up. Thus, it’s important to do everything possible to hedge your bets and prepare to weather those storms.
One of the most powerful strategies you can use to maximize the long-term growth of your portfolio is diversification. And you can diversify even within real estate. Through investing in a variety of different real estate assets, you can lower your overall risk and increase your chances of higher long-term returns.
Let’s talk about the top 5 ways to diversify your real estate portfolio, so you can protect your investments.
#1 – Asset Type
The variety of different asset types is one of the things that makes real estate investing so fun. You can choose to invest in everything from single family homes to small multiunit properties to large apartment complexes. You can invest in retail, industrial, office space, self storage, and more.
There’s value to be added and money to be made in all asset types. By investing in different types of assets, you are hedging against broader macro changes to the economy, like the shift we’re currently seeing in the retail space with the growth of ecommerce.
#2 – Location
Real estate is hyperlocal, meaning that one city might be booming, while a neighboring town might be experiencing a slowdown. As a real estate investor, you want to invest in areas that are growing or have the most potential for growth. By diversifying across different geographies, you can take advantage of the ups and downs of various markets and hedge your bets against a major correction in any one market.
If all your real estate holdings were within one market, and that market were to hit a slowdown, your overall portfolio would be in jeopardy. However, if you had one investment in Dallas, another in Orlando, another in Charlotte, and so on, the impact to your overall portfolio would be much less pronounced.
The problem is, it’s easy to think about diversifying across different markets but another thing entirely to actually invest in multiple markets. After all, for each market, you have to do a significant amount of market research, connect with local brokers, perhaps fly out to see properties, and more.
This is what makes passive real estate investing so attractive, as you can leverage the experience and connections of the sponsor team to get you into each market. You would still need to do your own due diligence, but you wouldn’t have to start from scratch in each new market.
#3 – Asset Class
When diversifying across asset classes, it’s important to understand a bit of human behavior during booms and busts. Let’s use apartments as an 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, and because no one knows when the next recession will hit, it’s important to diversify across asset classes, to ensure your portfolio is profitable in all parts of the market cycle.
#4 – Hold Length
For real estate syndications, a great way to diversify is through the length of the hold time. Many of the real estate syndication deal that we do come with a 5-year hold. However, we’ve also done some with a 7-year hold or longer.
It’s important to consider the hold length and timing of the deals, to ensure that you’re not entering or exiting a bunch of deals all at the same time.
#5 – Funds
A very easy way to diversify quickly is to invest in a real estate syndication fund. Unlike a syndication for a single asset, a fund pools together investor money to buy a variety of different assets within a specified period of time.
Typically, the fund is defined by certain geographies, asset types, and asset classes. If you find a fund that fits with your investing criteria, and with a great sponsor, this could be a great option for diversification.
We’ve been in an up market for several years now. It seems that virtually any piece of real estate you touch turns to gold. But as history has shown us, the real estate market is cyclical. What goes up must come down. Sooner or later, we will hit a correction, and it’s important that you diversify your portfolio before that happens.
Whether you diversify through asset type, location, asset class, hold length, or by investing in funds, the choice is up to you. Having these in the back of your mind as you evaluate different investment opportunities will help you balance and diversify your portfolio.