Investing in real estate has historically been one of the safest investment types by risk. It’s especially effective when you have a strategic portfolio. In fact, according to the Journal of Real Estate Research, diversifying your portfolio can reduce your risk by 60%-94% in both the U.S. and European markets.

This is why Marketplace Homes is prepared to assist all their investors with important decisions like how to diversify their portfolio to minimize risk and maximize returns. There are many ways to diversify in real estate. As a national full service brokerage, we can easily get you into different geographical markets. Let’s dive a little deeper into this concept so that you can take the best route for your investments. 

What is Diversification?

Diversification is when a business varies or enlarges its products or field of operation. In real estate, diversification increases an investor’s chance of achieving long-term growth. There are several ways to diversify your portfolio in real estate. Here’s what it can look like: 

  • Diversifying by asset type: This involves buying different types of properties that appeal to different occupant needs, which strengthens your portfolio’s appeal. You can go as broad as categories (retail, residential, industrial, commercial) or as specific as building type. A diverse portfolio by asset type can include:
    • Retail space
    • Single family homes
    • Multifamily units
    • Apartment complexes
    • Office space
    • Restaurant space
    • Self storage
    • …and much more!

By having different property types, you can decrease the impact of market fluctuations. A portfolio going down at once can be detrimental to your business, while diversifying in terms of location makes you far less vulnerable to the winds of change.

Ways to Diversify Real Estate

  • Diversifying by asset price bracket/class: Investing in properties at different price points can ensure you have listings that are accessible to different buyers. Having an assortment of starter homes as well as move-up homes and apartments ensures that your portfolio is appealing to people with different income levels and circumstances.
  • Diversifying by location/market: Markets don’t always cycle uniformly, and you can even find a city booming in spite of a recession. If you put all your properties in one place, they will all feel the effects of that market alone. However, if you invest in different locations, you can find that while one set of investments may be on hold for better days, you can sell high in another location – or even flip a property or two in another. 
  • Diversifying by hold time: Long-term rentals generate steady passive income, but if you switch up your holding times, you can play with different timelines and see which ones work for you. While one property may be an excellent investment for decades and beyond, you may buy and hold another for just a couple of years and sell. 
  • Diversifying with active and group investments: You may actively manage part of your portfolio with a property manager but then partake in group investments for high-maintenance properties like large commercial buildings or apartment complexes.

Since it would require a book to do all of these examples justice, we will stick to the overall value of diversifying by the property’s market. How does buying homes in different locations help you maintain growth? 

Diversifying by Market with Investment Types by Risk in Mind

Since no two real estate markets are the same, you can take advantage of how different locations won’t have the exact market conditions. This means that you use different markets/geographies to make decisions that benefit your financial profile. For example, if you have assets in a declining market and there is little chance of a full recovery (such as a town with declining population or loss of major employers), it may be time to release properties in this area. There are also instances in which you can confidently invest. Look for markets with these characteristics:

  • Positive job growth: Currently, areas like Memphis TN and Atlanta are experiencing steady growth due to the plentiful availability of jobs. When you see healthy builder activity as well as people flocking to the area for work, you can be confident that these people will need homes and places to set up business.
  • Positive population growth: More people = more people who need roofs over their heads and places to work. Since housing is a universal need, you can count on a higher population triggering more demand for homes.
  • Popular tourist spots: Demand for luxe vacation homes in desirable locations (such as near Disney World, ocean fronts in hot locations, etc) generally remains steady.  Just be sure to have a plan to offset costs during non-peak seasons.
  • Standard, affordable rentals in stable locations: Everyone needs a roof over their head, and if you provide affordable apartments or affordable single family homes for rent, there will be interest in practically any market. People are always looking for the best deal, so keeping low-cost bracket properties in your portfolio helps you maintain cash flow.

Taking Advantage Of Slowdowns

Slowdowns can also become an opportunity if you time your actions wisely. For example, a cooling market means lower prices. If you bet against the market recovering in your favor, then you can buy low with the potential for values rising in the future.

To assess risk vs. reward, it’s important to discuss any acquisition with your real estate agent to examine the property. Criteria examine would be its market, its trends, and upcoming developments. Who knows? Maybe this same slow market will be booming when other properties go flat in the future? This method will carefully examine your investment types by risk individually.

Know Investment Types by Risk

“Don’t put all your eggs in one basket” is valuable advice that can apply to a variety of situations, including real estate. Marketplace Homes has seen many market cycles. We’ve seen markets go up and down since 2002, and we’re still here assisting a variety of clients with their real estate needs. If you want to learn more about diversifying your portfolio by geographical market, contact us today. 

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