Were you ever a Girl Scout? Do you remember the motto? "Be prepared ." What does that mean?
It signifies that you are always ready to serve and do your duty no matter the circumstance. Today it means extra masks in your purse and the glove box of your car, and hand sanitizer tucked everywhere. 😷
Similarly, it's essential 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 weather economic cycles successfully 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.
Diversifying Your Real Estate Portfolio
Here are 5 ways to do this:
#1 - Asset Type
Within the real estate world, there are a variety of asset types. 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
One city might be booming at any given time, while a neighboring area may be experiencing a lull. Smart real estate investors desire properties in the growing regions or those expecting growth.
By diversifying 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 you'd need to feel comfortable investing in them. Faced with the challenge, you can leverage the sponsor team's expertise in each market, which is what makes passive investing so attractive.
#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. Consider the range between moderately priced units, nicely developed units for the upper-middle class, and finally, the ultimate luxury apartments 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 prudent to have both in your portfolio so that your portfolio is profitable at any given point in the economic cycle.
#4 - Hold Length
Real estate syndication investments have an associated hold time, ranging between 3 -10 years (or more). Consider varying the hold time of your assets so you're not entering and exiting more than one deal at a time.
#5 - Funds
One of the easiest ways to diversify quickly is to invest in a real estate syndication fund. A fund pools together investors' money to buy various assets within a specified period. Funds can be defined by geography, asset type, or asset class.
At certain points in the market cycle, it will feel like 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 is true and that during one phase of the cycle, investors should diversify portfolios in preparation for the next stage.
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.