Real estate investing is a tried-and-true wealth-building strategy that can help you leave a family legacy. However, like all investing, real estate investing carries risk. With the right approach, you can limit your risk when buying stakes in real estate, but you have to know how to diversify your portfolio. Diversifying means investing in multiple sources and using a variety of investing strategies. This guide explains why it’s important to diversify your real estate portfolio and how to do it so you stay profitable in your endeavors.

What Does It Mean To Diversify Your Investment Portfolio?

Diversifying your investment portfolio means holding more than one type of asset or asset class and using many ways to generate wealth. A portfolio with stocks, bonds, mutual funds, exchange-traded funds, and cryptocurrency is a diverse account. In real estate, you can diversify your investments by spreading your holdings across various sectors or locations around the state, country, or world. Having many types of real estate can help ensure that you grow your wealth in the long term. For some real estate professionals, it’s tempting to continue to invest in familiar areas, but this elevates your level of risk.

For example, if you own single-family homes in an area where multifamily properties are suddenly in higher demand, you could profit by changing your investment strategy to include multifamily dwellings. You don’t want all your investing power to be in one sector because this can mean you lose money if that sector experiences a downturn. Spreading your investments out to cover areas that aren’t directly correlated in the market is the best way to protect your money. With real estate, this can mean investing in residential and commercial properties, as well as real estate investment trusts (REITs).

What Are the Benefits of Diversifying Your Portfolio?

Diversifying your real estate portfolio comes with many benefits. The main reason to diversify is to limit your risk. Holding more than one type of real estate shields you from losses if one real estate market softens. With diversification also comes the potential for increased gains. Several assets classes in a portfolio might gain value at the same time, boosting your potential for earning profits or increasing your cash flow. 

Reaping the rewards of more than one asset type is only possible when you diversify. These rewards might include taking advantage of certain tax breaks only allotted to specific types of assets. Talk to your tax advisor to find out more about the benefits you might gain based on your local tax code. You’ll also be better prepared for market fluctuations when your portfolio contains real estate in multiple geographical locations. Some places can withstand economic changes better than others. Stepping out of your comfort zone and diversifying your real estate portfolio can help you achieve your financial goals.

What Are the Risks if You Don’t Diversify?

Perhaps you’re comfortable holding REITs in your portfolio because you don’t actually have to own a specific property. Instead, you’re investing in a company that owns and operates many properties, often across a range of sectors. Because the REIT holds property in the commercial, industrial, and residential industries, you believe you’ve diversified. Unfortunately, this isn’t the case. The reason is that you’re relying on a single company to make good investment decisions. If the CEO makes too many poor choices, it will affect your entire real estate portfolio. 

In Florida, Miami and Orlando have more resilient real estate markets than more rural areas, such as Gainesville and Tallahassee. However, interior cities have cheaper prices, making it less expensive to buy real estate. Diversifying across the state or even further helps protect your money if the market softens.  

How To Diversify Your Real Estate Portfolio

We’ve touched on the key points regarding risks and rewards of diversification, but let’s delve into how you can diversify your real estate portfolio.

By Asset Type

There are four main types of real estate:

  • Residential.
  • Commercial.
  • Industrial.
  • Land.

Investing in more than one of these asset types diversifies your portfolio, allowing you to realize gains in many areas of real estate. This can also help limit your losses if one asset type isn’t doing as well as another. In the current market, commercial and office space markets are softening, while housing is more in demand.

By Asset Class

Real estate asset classes are broken up as follows:

  • Class A: These upscale properties have higher asking prices for both purchase and rent, and they’re located in desirable areas with good schools, shopping districts, and green spaces.
  • Class B: These older properties are still desirable and come with a higher-than-average rent price. However, there’s a difference between the quality of Class A and B tenants and buyers.
  • Class C: These properties may come at a lower rate than newer properties and often have fewer amenities. Those in the market for Class C properties are looking for something functional at an affordable price.
  • Class D: These fixer-upper properties often have issues that require significant maintenance and repairs. Many people purchase Class D properties if they plan to fix and flip a home or building.

Each of these asset classes offers a way to increase profits in your real estate portfolio. Investing in multiple asset classes protects your money if one class suffers a downturn.

By Location

Holding real estate assets in multiple locations allows you to benefit from the micro economies of various places. Miami, for example, can fair well even when other locations struggle due to its desirability and strong job market. This is often true of most large cities, but San Francisco, one of the country’s most valuable real estate markets, has recently seen a decline in housing prices and an even bigger decline in the number of homes sold.

By Strategy

Your investment strategy should include diversification into multiple areas of real estate. Holding REITs isn’t enough. It’s best to have private equity funds, single-family and multifamily rental properties, commercial space, and land in various asset classes and across a widespread area.

Get Help Diversifying Your Real Estate Portfolio

Diversifying your portfolio makes it stronger and more resilient. Don’t miss out on opportunities because you aren’t holding the right real estate assets. Let the professional financial experts at Titan Funding guide you through your investment diversification journey. Contact us today to learn more.

white and blue boat on water near city buildings during daytime by Chris Norberg is licensed with Unsplash License