Investing in real estate is a great way to build wealth and one of the best ways to make passive income, but if you’ve only invested in one property, you might be betting all of your money on one asset. And if you ask us, that’s a very risky move.
Not convinced? In this article, we explain why you’ll want to diversify your portfolio with multiple properties, plus list down a few examples of how to do that.
Why diversify your real estate investment portfolio
Owning only one property, regardless of its type, puts you in an unpredictable position, and leaves you at the mercy of market changes, unexpected events (e.g. COVID-19), and more. Sure, it might seem like a smart strategy, but it’s a bit like investing all of your money in one stock—you could win big, but there’s also a chance that it will tank.
By spreading out your investments across multiple properties and property types, you’ll be able to weather the downturns. Think about it—if one market tanks and you’ve only invested in that market, your investment portfolio will surely suffer. However, if you’ve invested in multiple markets and one of those doesn’t do well, you won’t experience such a significant loss.
You’ll also be able to grab any growth opportunities that come your way. This is because it opens up new investment opportunities in more markets, rather than limiting yourself to only one. Overall, owning multiple properties allows you to spread out your risk, gives you peace of mind even when things get tough, and allows you to grow your earnings.
How to diversify your real estate portfolio
Investing in multiple properties can be an effective way to protect yourself from risk and maximize returns, but how exactly can you go about it? Below, we’ll explore some of the key ways to do that, from exploring various property types (e.g. residential, commercial, etc.) to targeting a wide range of geographic locations and strategies.
Diversifying your portfolio by property type
Investing in various property types is one of the best ways to diversify your portfolio. It can be an effective way to boost your returns and benefit from consistent cash flow over the long term.
For example, residential real estate often offers consistent, long-term income streams, while commercial properties (e.g. offices, malls, retail centers, etc.) provide you with greater potential returns. In economic downturns, the demand for commercial properties will most likely decline, but the demand for residential properties will likely be stable. On the other hand, when the economy recovers, the demand for commercial properties will rise again, giving you the chance to earn more money.
You don’t even have to purchase properties of various types—you can simply invest in multiple properties within the same asset type. For example, you could invest and manage short-term rentals (i.e. vacation homes) and rental homes at the same time. Remember, people will always need a place to live, but it wouldn’t hurt to invest in Airbnbs so you can capitalize on the vacation season, as well!
Diversifying your portfolio by location
Most investors don’t realize this, but you don’t have to invest only in the area where you live! You can always invest in properties outside of your area and hire a property management company to maintain them for you.
For one, investing in various locations allows you to minimize the impact of local economic downturns. For example, if one market were to experience a slowdown, your investment portfolio wouldn’t be in trouble if you have properties in other markets. In addition, purchasing properties across many locations allows you to capitalize on each of their demands. For example, one market may have a higher demand for vacation rentals, while another market may have a higher demand for long-term leases.
Diversifying your portfolio by strategy
Your final option is to diversify your portfolio by investment strategies that guarantee ROI. For example, you could buy a couple of properties to buy-and-hold, as well as a few fixer-uppers which you’ll fix up yourself and sell immediately afterward. This will allow you to manage risk, as well as deal with the ever-changing market conditions, more effectively.
For example, if the rental market is doing well in a particular area, it would be a good idea to implement the long-term buy-and-hold strategy. On the other hand, if the market is experiencing a downturn, you could switch up your strategy by buying fix-and-flip properties instead—this will allow you to generate faster returns.
Be careful not to over-diversify your real estate portfolio
While it’s important to diversify your real estate investment portfolio, investing in way too many properties isn’t a good idea, either. Over-diversification can lead to increased costs, not to mention make it more challenging to stay on top of market trends and tweak your strategy if you have too many investments to handle.
To avoid over-diversifying, it’s crucial to have a clear investment plan. Consulting a property management firm is a great way to narrow down your options, and find properties that will allow you to achieve your investment goals. It’s also important to regularly review your portfolio to check if it’s still aligned with your investment goals and risk tolerance.
If you’re serious about expanding your real estate investment portfolio, it’s time to diversify. Don’t rely on one property to carry you to financial success—you must invest in multiple properties to maximize your returns. It may take a bit more effort, but the rewards will be worth it. With a diverse portfolio, you’ll be able to weather any challenge that comes your way and have more chances to capitalize on various markets.
With Luxury Property Care, you can explore new investment opportunities through our investment consultancy services. Not only will we help you identify the most profitable properties and locations, but we’ll also help you determine the ideal investment strategy for each. And if you’re worried about managing your vast portfolio, we’ve got your back—with property managers across South Florida, managing multiple properties will be easy and stress-free.