Your real estate portfolio should demonstrate diversification to remain healthy. You must diversify like all types of investments. In fact, because real estate takes longer to convert to cash than stocks or bonds, real estate diversification is even more important.
Strong diversification includes investing in a variety of locations and asset classes. Investors should ensure that different investments rely on different economic sectors. Long-term success requires balancing risk and reward.
Here are three critical diversification strategies:
Invest In Multi-Family Properties
Multifamily properties are a better risk for your real estate portfolio than single-family homes. Real estate investors consider apartment buildings the gold standard to diversify their portfolio because they have higher unit availability and larger markets. A single or several vacancies don’t destroy cash flow. With single-family rental units, a vacancy means no revenue from the property.
Apartment buildings also scale quickly because of the multiple streams of revenue. Since the income is larger and more steady than single-family homes, an investor has a better chance of obtaining financing on additional properties.
Compared to residential properties, commercial properties require more work and carry more risk. The investor’s financial wherewithal must also be greater. In return, the investor enjoys higher cash flow, more steady income and a 6 percent to 12 percent ROI in their real estate portfolio.
Considering that residential real estate ROI is 1 percent to 4 percent, the extra work of commercial properties is well worth it. Several factors contribute to the increased cash flow, including the following:
- Longer term leases.
- Lower vacancy rates.
- Higher revenues.
- Lower default rate.
- Triple net leases.
Triple net leases make the tenants responsible for expenses beyond rent, such as taxes, insurance and maintenance. Investors should diversify within commercial real estate because its markets tend to be more volatile. Investing in a mix of industrial, office and retail spaces pads investors from downturns in individual sectors.
Though commercial real estate investment is challenging, there is less competition than in the residential space. Because of the larger startup investment, substantial learning curve and increased complexity, many real estate investors never make the leap from residential landlord to commercial real estate investor.
Investors can also gain broad exposure to real estate investing through Real Estate Investment Trusts (REITs). REITs trade on stock exchanges, so only a small investment is necessary to start. Investors receive annual yields that are sometimes over 10 percent plus the prospect of share appreciation.
REITs own equity shares in multiple sectors of real estate, including residential, commercial and mortgage companies.
Real estate investing provides high returns for a real estate portfolio when investors pick the right markets. As with stocks, making an effort to diversify protects investors during down swings and offers more opportunities to score big when markets accelerate.
If you need help to diversify your real estate portfolio, the team at LCI Realty can electrify your investments and even manage your property so you can earn cash without the headache. Contact LCI Realty today.
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