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Diversification is the key to building strong long-lasting investment portfolios.
Between making it easier to manage risk, expanding potential profits and increasing your avenues for growth, so taking the time and money to diversify your portfolio is one of the most reliable ways to succeed as an investor.
So what exactly does it mean to diversify your portfolio? And how does doing so help you achieve success as an investor? Let’s take a look.
However, before we show you how to diversify your real estate portfolio, it is important to take the time to lean how to diversify your portfolio’s financing. After all, if you use the same lenders and products for all of your investments, you are almost certainly going to find yourself stuck and unable to make new investments. So, to learn how to get well-structured and diverse financing today, click the link below to book a free strategy call today.
What Does it Mean to Diversify Your Portfolio?
When you are looking to diversify your portfolio, there are two different things you need to take into account – the type of assets you are investing in, and where those assets are located. As they saying goes, you should never put all of your eggs in one basket, and the same is true for real estate. If you strictly buy one type of property in a single neighbourhood, a single downturn in the market has the potential to jeopardise or knock out a large portion of your investments all at once. Instead, you need to spread out your investments.
Instead of buying strictly single-family homes, you may want to consider buying some multi-family or commercial properties as well, that way if a specific type of property takes a hit, the impact on your overall portfolio is reduced. As well, if you buy your properties in various neighbourhoods or cities, you can avoid taking too large of a hit off of downturns in a single market.
Benefits of Diversifying Your Investments
There are plenty of benefits to spreading your investments out across diverse assets. Naturally, the strength of each individual benefit will vary based on how your structure and diversify your portfolio and how you decide to invest, but here are the main three advantages you can expect to witness.
First and foremost, one of the biggest benefits of taking the time to diversify your portfolio is the ability to better manage and reduce the risk you are taking on as an investor. Buying multiple properties is already a strong way to reduce the immediate risk you are experiencing as an investor. For example, if you own multiple cash flowing properties and one becomes vacant for a few months, your other properties can help you cover the expenses on that property until you are able to find a new tenant.
Similarly, if the rental market took a hit and suddenly you found yourself with fewer renters, or if renters were no longer willing to pay as much for rent in a certain neighbourhood, you can cover the losses and risk you are facing by owning properties in another neighbourhood or investing in commercial properties in order to manage the downturn until things recover.
Multiple Avenues for Growth
Different types of real estate investments have different avenues to scale and expand over time. By investing in multiple types of real estate assets, you provide yourself with the opportunity to take different routes to grow and diversify your portfolio depending on your needs and capacity at any given time.
If you have the time and capital ready, perhaps you may decide to buy new residential properties. If you’re a bit busier, you could decide to buy condos in self-managed buildings. If you are looking for a hands-off option, you could consider investing or buying additional shares in REITs or private equity firms. Alternatively, you may look to expand the usefulness of individual properties through the construction of ADUs (additional dwelling units) to add additional units to your residential properties, or you can add additional amenities to your commercial properties to expand the types of businesses that can use the space.
Balancing Short-Term and Long-Term Benefits
Not all investments share the same balance between long and short-term benefits. While some investors will buy a property for its high potential cash flow, or an REIT for the consistent dividends they are going to be paid, other properties are good for their potential to appreciate and gain a ton of value over time. However, not all properties are great for both reasons.
Some cash flowing properties appreciate very slowly, meaning their resale value is not going to be much higher than the purchase price when it comes time to sell. Likewise, some properties that have the potential to appreciate a lot and sell for much more than their purchase price produce very little cash flow – in some cases they may even lose money each month.
Instead of relying solely on one type of property, a diverse portfolio can make it possible to reap the long-term benefits of a rapidly appreciating property while also earning a healthy cash flow in the meantime.
Discover How To Buy Commercial Real Estate With This Step By Step Guide
What Types of Investments Can You Make To Diversify Your Portfolio?
While the specific types of real estate investments you can make are countless depending on the property, region, and type of investing you would like to pursue, most of them will fall under the following categories. Consider each one and how they can work together to help you fortify and diversify your portfolio.
Single-family residential properties such as single condos or single-family houses are what most people think of when they picture real estate investments. These are often used as long-term rentals, however, sometimes there may be potential to use them as a short-term rental if the market permits it.
Multi-family properties are great for offering multiple streams of cash flow from a single property as well as their reduced risk of vacancy. If a single unit on your multi-family property winds up becoming vacant, you still have the other units to cover your expenses and potentially produce cash flow as well. These are a great investment tool to diversify your portfolio while keeping a familiar experience to your existing investments.
Commercial Real Estate
There are plenty of varieties of commercial real estate for you to consider. From retail stores to mixed-use properties, to office spaces and beyond, commercial real estate offers a ton of opportunities for you to diversify your portfolio.
While technically considered commercial real estate, industrial properties such as factories and manufacturing facilities are often considered very expensive but very lucrative investments provided that local industry is thriving.
REITs and Private Equity
Real estate investment trusts and private equity firms are much more hands-off approaches to real estate investing. Instead of buying and managing your own properties, these options allow you to buy shares in companies that manage their own real estate portfolios and pay out the profits in the form of dividends to their shareholders.
If you are getting ready to invest in real estate, get a head start by getting pre-approved from an experienced lender. To lock down highest available financing at the lowest available rates, give us a call at LendCity, our number is 519-960-0370 or you can fill out an online application at LendCity.ca Alternatively, click the link below to book a free strategy call with our team.