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The Smart Way to Diversify Your Real Estate Investment Portfolio

The Smart Way to Diversify Your Real Estate Investment Portfolio

Portfolio diversification is a strategy many stock and real estate investors use to reduce the risk associated with certain high-stakes investments. It’s a way of balancing the potential losses in a fix-and-flip project, for instance, with the profits from a single-family rental property. Since we specialize in a wide range of real estate hard money loans, we know a thing or two about portfolio diversification.

Below are some savvy tactics to diversify your real estate investment portfolio.

Diversify by Location

Many investors hesitate to buy property in a different town, city, state, or country because it will be too far to manage and look after. Plus, an unoccupied property attracts squatters, a deterrent for many out-of-state investors. 

However, you can install an alarm system that instantly alerts the authorities if you have an intruder. A reputable property management company can take over the repairs, management, and rent collection for a service fee, which means there’s nothing stopping you from investing in a distant property.

It will help if you diversify your real estate portfolio by location because they represent different markets. If the market you’re currently in is trending downward, you can invest in other markets (read: locations) to capitalize on their upward trend and recuperate your losses.

Diversify by Mixing Investments

There are two types of real estate investments: active (direct) and passive (Real Estate Investment Trust). You’re very much involved in that property when you make an active investment. Take rental real estate, for instance. You actively search for a short-term rental loan and take full responsibility for this investment property’s maintenance, upkeep, and rent collection. Even if you’ve hired a property management company to share some of the workloads, it’s still an active investment.

A passive investment is nothing like an active investment. It’s more about buying shares belonging to a real estate investment trust (REIT) or company, real estate funds or crowdfunding opportunities. Despite not being actively involved in the properties, you would still earn a cut of the profits and monthly rent.

By mixing passive and active investments, you can dip your toes in both pools, maximize profits, and balance out one asset’s losses with another asset’s profits.

Diversify by Assets

Below are the five main types of real estate assets:

  • Residential
  • Commercial
  • Industrial
  • Raw land
  • Special use

They offer you the easiest way to diversify your real estate investment portfolio. The more of these asset classes you include, the higher your chances of making a profit and offsetting your losses. You see, the residential market cycle doesn’t rise and fall with the commercial market cycle, nor does the commercial market cycle follow the trends of the industrial market cycle.

Try to have at least two of the above asset classes in your portfolio because investing in one market could be disastrous. For instance, if you’ve only invested in residential real estate, you’re in for a huge loss once its cycle crashes.

However, if you’ve invested in residential and commercial real estate, you might offset the losses of the crashing residential market with the high-flying commercial market.

An Investor Submitting a Real Estate Loan Application for a Residential Property

Diversify One or More Asset Classes

A group of investments—real estate or stocks and bonds—with the same characteristics accountable to the same local laws make up an asset class. These classes are more specific than the categories we just delved into. For example, if residential real estate is an asset category, rental property is an asset class. 

Taking this example further, you can diversify the rental properties you own to offset your losses. If you rent out vacation properties, having another rental real estate during the offseason could help you continue that rental income. Owning a few single-family rentals can also benefit your bottom line during peak season because you’ll have money from all your assets. We recommend doing this for all asset classes in your portfolio.

Diversify Through Long-term and Quick Investments

Most real estate investment strategies can be split into long-term and short-term categories. Seasoned investors know how to play the waiting game while making a smaller, quicker investment to stay afloat. An example of their short-term investments includes:

  • Buying a dilapidated property.
  • Applying for an investor rehab loan.
  • Refurbishing the property.
  • Putting in on the market to make a quick profit.

They can make such quick investments while waiting for another property’s long-term prospects to come to fruition. An example of a long-term strategy would include buying a property in a neighborhood close to the city with public transit in the pipeline and then waiting for the prices to flourish before reselling it. They can keep flipping houses as they wait to ensure positive cash flow.

What Does a Diverse Portfolio Look Like?

A diverse real estate investment portfolio embodies all the strategies you’ve used to diversify it. It should have multiple properties in each market and multiple markets overall.

If you’ve employed all of the above tactics, your portfolio should span cities and states—maybe countries—and positively impact your bottom line.

InstaLend: Here to Streamline the Positive Impact

Portfolio diversification is profitable, but its upfront costs are seldom within an investor’s budget. Lucky for you, InstaLend can help you expand your budget and purchase properties through short-term residential and commercial bridge loans, long-term rental property loans, and many other programs without an upfront fee or income check. Apply for a hard money real estate loan to diversify your investment portfolio today!

Contact us for inquiries and requests.  

  • April 12, 2023
  • 5 min read
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