Got Diversification? 5 Ways To Maximize Your Real Estate Portfolio

Got Diversification? 5 Ways To Maximize Your Real Estate Portfolio

One of the top reasons new members of the Passive Investors Circle initially join is the concern that the majority of their investments are in the stock market.

Basically they’re seeking other alternatives realizing that diversification is important because of the old adage, “Don’t put all of your eggs in one basket.”

Remember When Your Kids Were Young?

For some of you older folks like me, let’s take a trip back in time when we first had kids. Can you remember back that far? It’s hard to believe how quickly time flies!

We have two boys and we approached parenting MUCH different with our oldest versus our youngest. With our first son, it seemed we were paranoid when it came to germs. No matter where we went, we ALWAYS had baby wipes stashed everywhere.

My wife had them in her purse, the diaper bag, multiple places in the baby’s room, and in the minivan (yes we had a minivan…two actually!). 

The purpose, of course, was to prepare for those unexpected moments that accompany having a new child. At that time, we didn’t know exactly what to expect, or when a surprise spit-up would happen, but we did know to always expect the unexpected. 

The same goes for your real estate portfolio too…

Diversifying Your Real Estate Portfolio

Similarly, it’s important to expect the unexpected with your real estate portfolio. We can’t predict the future market, but, based on historical data, we know to expect cycles.

Market corrections and recessions occur every so often, so it’s important to prepare your portfolio to withstand those fluctuations.

One of the most powerful strategies used to successfully weather economic cycles is diversification.

Even within real estate, you can diversify and maximize the long-term growth of your investments. By investing in a variety of different real estate assets, you can lower the risk overall.

Here are 5 ways to do this:

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Diversification-5 Ways To Maximize Your Real Estate Portfolio

#1 – Asset Type

Within the real estate world, there are a variety of asset types to choose from. You can invest in:

• retail
• industrial
• multifamily
• office space
• self-storage
• and more….

By varying the types of properties you invest in, you’re hedging against broader changes to the economy.

#2 – Location

At any given time, one city might be booming while a neighboring area may be experiencing a lull. Smart real estate investors desire properties in growing areas or those expecting growth. 

With diversification across multiple cities, counties, or states, you can take advantage of the potential across several markets and hedge your bets against a correction in any one area.

The challenge in diversifying across geographical locations is obtaining the research, connections, and more that you’d need to feel comfortable investing in them.

This is what makes passive investing so attractive to busy doctors – you can leverage the expertise of the sponsor team in each market. 

#3 – Asset Class

Aside from asset type, there is also asset class, which is a range of moderate-to-luxury unit prices within each asset type.

Take an apartment complex, for example, and consider the range between moderately priced units, nicely developed units for the upper-middle class, and finally, the ultimate luxury apartments that are available in some areas.

Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during the so-called booming economic years.

It’s important to have both in your portfolio so that at any given point in the economic cycle, your portfolio is profitable.

#4 – Hold Length

Real estate syndication investments have an associated hold time which can range between 3-10 years (or more).

Consider varying the hold time of your investments, so you’re not entering and exiting more than one deal at a time.

#5 – Funds

One of the easiest ways to benefit from diversification is to invest in a real estate syndication fund which is different than a Real Estate Investment Trust (REIT).

A fund pools together investors’ money to buy a variety of assets within a specified period of time.

Funds can be defined by:

• geography
• asset type
• asset class

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Summary 

At certain points in the market cycle, it will feel as if the market will go up forever. Conversely, it may feel like the market will continue a downward spiral forever.

We know that neither of these are true and that during one phase of the cycle, portfolios should be diversified in preparation for the next phase. 

Keep these 5 ways to diversify in the back of your mind as you explore potential deals.

Doing so will help you find various opportunities to diversify your portfolio, no matter the current market cycle.