If there’s one piece of advice you’re guaranteed to hear from investing gurus, it’s this: Don’t put all your eggs in one basket. And that is, indeed, sound advice – even though those gurus tend to call it “investment allocation” or “diversification.” The chief reason for this is so your basket won’t fall to the ground and all the eggs get broken.
Or it’s a good way to mitigate risk – that is, minimizing the impact of not-so-good assets in your portfolio so that overall and over the long haul you come out ahead. Let’s look then at how to diversify your portfolio with real estate investing in .
Rental Properties
Investing in rental properties is an excellent way diversify your real estate investment portfolio. It’s an easy way to get started, and it assures you of a monthly cash flow in collected rents. And that cash flow is highly important for beginning investors. If the monthly rents exceed mortgage payments and other expenses like taxes and insurance, you’re guaranteed at least a little profit and ROI.
Fix and Flip Properties
Another popular real estate investing strategy is buying, rehabbing, and then re-selling house. The risk here is greater, but so is the quick profit potential. The other drawback is that the longer you hold the property (if, for example, the market takes a downtown and you have trouble selling), the less money you ultimately make because you’ll be paying on the mortgage longer. But, again, that’s the whole point of diversification – to mitigate such risk.
Multifamily Properties
If you’re a more experienced investor wondering how to diversify your portfolio with real estate investing in , you might consider multifamily properties like apartments. The benefits of diversifying with multifamily properties, also known as multi-dwelling units (MDUs), are significant and include greater cash flow, risk reduction, and scalability.
A huge benefit of multifamily properties is that a single investment can yield a very good cash flow in multiple rents, providing passive income and possible financial freedom. There can also be less risk because some or most units will always be occupied, so a few vacancies won’t be as devastating as a vacancy in a single-family dwelling. In addition, there’s the opportunity for scalability because you can often continue to acquire properties/units within a single building.
Commercial Properties
Another diversification possibility for even more advanced investors is commercial properties. This involves purchasing properties and then leasing individual units to businesses. While the income potential is good, it’s a complicated process and there’s a good deal of attendant risk. It also takes a huge investment up front that is out of reach for many real estate investors.
One of the great benefits is that there is generally far less competition because it’s complex and outside many investors’ comfort zone. Another huge benefit is the potential for safe and assured cash flow. Leases for commercial real estate are usually for much longer periods than residential rental contracts/leases, so recurring vacancies aren’t a concern and the cash flow is fairly consistent. And commercial properties usually yield a much better ROI, generally around 6% to 12%, than residential properties, which yield 1% to 4% on average.
Investing in real estate can definitely be a solid investment strategy, especially if you learn how to diversify your portfolio with real estate investing in . Just keep in mind your current situation and expertise level in your diversification efforts. And we would welcome the opportunity to help you achieve your real estate investing goals.