5 Ways Real Estate Investors Can Diversify Their Portfolio
Posted on: 9 March 2023
Any successful investor knows that diversification is the key to building a strong portfolio. For real estate investors, diversifying investments within the real estate sector can be a great way to spread risk and ensure long-term success. Here are five ways you can diversify your real estate portfolio.
Buy-and-Hold
The buy-and-hold strategy involves purchasing properties with the intention of holding them for an extended period. This strategy is popular among real estate investors because it allows them to collect steady rental income without worrying about finding new tenants or dealing with turnover costs. Additionally, this strategy can provide tax benefits and potentially increase the property's value over time due to appreciation.
Fix-and-Flip
If you primarily invest in buy-and-hold properties, consider mixing things up with a fix-and-flip house. This strategy involves purchasing properties in need of repair, fixing them up, and immediately selling them for a profit. Done correctly, you can walk away with a tidy profit in just a few months. However, you must have extensive knowledge of local markets, contractors, and construction costs to ensure success.
Multi-Family
Investing in multi-family properties involves buying larger buildings with multiple apartments or units that can be rented out individually. Moving from single-family rentals to multi-family can be a little nerve-wracking for newer real estate investors, but this type of investment typically yields higher returns.
It should be noted that banks consider buildings with four or fewer units to be residential and those with five or more to be commercial. Purchasing in each category is another way of diversifying investments.
Short-Term Rentals
This type of investment involves renting out properties on a short-term basis rather than long-term leases. Short-term rentals typically generate higher returns but come with greater risk due to their transient nature. You must constantly search for new tenants and manage turnover costs between each stay. Additionally, this type of investment requires more work on the part of the investor, including marketing the property on various platforms, managing bookings, handling customer service inquiries, and housekeeping.
REITs
If you are priced out of the market right now or do not want to tie up too much of your cash, look into REITs (real estate investment trusts). REITs are a collection of real estate holdings. You buy shares in a REIT just as you would buy shares in any other publicly-traded company. Investing in REITs can supplement your existing real estate portfolio by providing increased liquidity and access to a wider range of properties.
Real estate investing is a great way to diversify your investment portfolio. With careful research and strategic planning, any real estate investor looking into diversifying investments can create a well-rounded, diverse, and recession-proof portfolio.
Contact a local real estate service to learn more about diversifying investments.
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