As you delve into the exciting world of investment properties, you’ll likely hear the term ‘portfolio diversification’ more than once. But what does that mean exactly? In essence, it simply refers to investing in more than one type of investment property.
Why does a diverse real estate portfolio matter?
Diversifying your real estate portfolio helps lower the risk of your investment. It does this by balancing out potential losses. For example, if rental properties are doing poorly, you won’t suffer huge losses as your other better performing, non-rental investment properties offset the overall effects.
A good real estate portfolio typically has varied investment property types or locales. The goal is to have investment properties that aren’t closely related to each other. You want to find investment properties that grow at different paces, so if one investment falls through, you have others to fall back on.
How to diversify your real estate portfolio
Now that you understand why it’s important to diversify your real estate portfolio, let’s delve into the how of it all. There’s more than one way to diversify property investments. Finding the perfect one relies on your investment goals and financial circumstances.
Here are some methods for diversifying your real estate portfolio:
Vary property investment strategies
Each property investment strategy has different levels of risk. Balancing out your property investments with long-term, short-term, high-return, and low-return property investments can strengthen your overall real estate portfolio. Because you’re not dependent on just one property investment method, you may mitigate potential losses and have a steadier flow of income.
Instead of focusing solely on rental properties, for instance, you could extend to house flipping, buy-and-hold, build-and-sell, and much more. This method gives you a healthy mix of short-term and long-term cash flow.
Branch out to different real estate sectors and classes
Real estate offers a wealth of options for investors. It’s not hard to find various types of properties. Aside from residential properties, property investors can also look to commercial, retail, industrial, and mixed-use spaces.
By varying the type of properties in your portfolio, you're not relying on a specific real estate market doing well. You can weather a shift in market trends much better, as well.
If you’re not interested in investing in various real estate sectors, you could also vary your property investments by class. A mix of standard single-family home investments and luxury properties like apartments or condos can be advantageous.
Diversify through different suburbs
Another great way to diversify property investments is by varying your investment location. Real estate is incredibly local with each suburb offering unique pros and cons. You can take advantage of several local markets by expanding where you make your property investments.
Investing in different suburbs lets you capitalise on various types of properties, as well. Before investing, make sure to get a suburb report to understand what the local market is like.
Ready to diversify your real estate portfolio?
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