Smart Ways Of Diversifying Your Real Estate Portfolio

In most cases, real estate investments have always been beneficial to those who have ventured into them. A real estate portfolio is generally considered as a conservative investment strategy, and property usually appreciates in value over time. If done properly, diversifying your portfolio can benefit you in many ways and increase the profitability of your investments.

By diversification, you do not place all your investments into one proverbial basket. Volatility is reduced and the impact of a downturn on your portfolio will be less severe.

A. Diversifying by sector – Residential, industrial and commercial
This method can provide a hedge against economic downturns and market fluctuations, as well as provide different revenue streams and investment returns.

Residential properties
A residential property is defined as any property used for residential purposes and can range from a detached house to an apartment complex. People will always require the need for housing, so this type of real estate has relatively stable demand. Residential property investment benefits from appreciation and rental income from tenants.

Industrial properties
A property that is classified as industrial is used for industrial purposes such as storage, manufacturing, distribution, and production, and includes factories and warehouses. Typical leases run for 5-10 years which gives more security to the investor and in many leases, the tenants cover some or most of the property expenses.

Because industrial properties require a larger capital expenditure, they are not as easily accessible to individual investors. The higher rental rates associated with such properties enables them to give higher yields than those for residential properties.

Commercial properties
Commercial properties are those that are typically used for business or commercial use, with the most popular ones being shopping malls and office buildings. Like industrial properties, commercial real estate typically gives the investor higher yields ranging from 5-10%, when compared to residential properties, and require a higher capital investment.

B. Diversifying geographically
Investing in different geographic locations can involve investing in different cities, provinces or even countries. This helps you reduce your risk profile, especially when there is an issue with a region or country. A local only strategy could be detrimental to your real estate portfolio if a natural disaster, economic or government issue or market recession were to happen.

At the same time, be aware of that you need to be familiar with the local real estate market, the regulations and laws. Investing in foreign countries may expose you to currency fluctuations and political and economic instability.

C. Diversifying by strategy

Using different strategies to build your real estate portfolio, is also a useful way if diversification.

  • Short-term – buy a property, wait for it to appreciate by a pre-determined percentage and “flip” it out.
  • Long-term – identify an up and coming neighborhood with good growth prospects and buy properties using the rental income to pay off in the short term, and appreciation for the long-term.
  • Invest in REITs or crowd funding platforms which can provide access to a diverse range of markets and properties that would not be available to individual investors.

Diversifying a real estate portfolio can offer benefits but can be challenging. If you are considering diversifying your real estate portfolio, contact us. We have a very strong regional presence and offices in 3 continents. Contact us and one of our trusted real estate advisors will work with you and review your real estate investment strategy.

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