Real Estate Portfolio Diversification

Whether you’re new to the real estate investing business or you’re a seasoned professional, diversifying your portfolio should be something you aim to do. Diversifying your real estate portfolio can reduce the risk of loss, increase capital, and create a consistent stream of income. 

So, how do you create a diverse real estate portfolio? 

Location, Location, Location

One of the biggest factors in successful real estate investing is the location of your investment properties. You can diversify your portfolio by investing in properties in different neighborhoods, cities, states, and/or regions. By buying properties in different areas, you decrease your risk of loss in a single area. 

Asset Classes

You can also add diversification to your real estate portfolio by purchasing properties in varying asset classes. This is especially helpful if your niche is commercial real estate. Some asset classes to consider include:

  • Multi-family real estate
  • Industrial real estate
  • Office space
  • Retail space
  • Mixed-use real estate

Risk Profile

Your real estate profile can also be diversified by risk. There are four risk profiles to know and understand if this is how you wish to proceed. 

  1. Core-Asset – these are stable investments. They offer the least risk, and usually, the least return on your investment.
  2. Core Plus Assets – These are similar to core assets, but the property may be a tad older or located just outside the desired location. 
  3. Value-added Assets – This risk profile includes properties that require some level of repair or maintenance; thus, they are sold at a discount. Because of the added risk involved with this type of property, there’s usually a higher return on investment.  
  4. Opportunistic Assets – These properties are the riskiest of all, but if managed correctly, can bring in the biggest return on your investment. Buying properties within this risk profile often requires expert knowledge and understanding of that specific market. 

Diversifying your portfolio based on risk allows you to mix safe, predictable investments with higher-return, higher-risk opportunities; thus, decreasing your risk of losing big should one or the other fall through. 

REITs

REITs are like stocks in that you purchase shares in a commercial property. This type of real estate investing involves little work on the investor’s part as property management companies do all the leg work for you. While REIT investments carry a fair amount of risk due to share price volatility, combining them with your other investments often offsets the risk involved. 

The Risk of Diversification

Even though a diversified real estate portfolio carries less risk and an increased return on your investments, it does have its pitfalls. The biggest issue with diversifying is that you need to have clear knowledge and understanding of several areas of real estate investing. A lack of expertise in any given area can lead to making poor decisions that cost you money. While the goal of most investors is diversification, the key to being successful is to go at it slowly and take the time necessary to really understand the niche.