The Best Ways To Diversify Your Real Estate Investments
Diversification is the golden rule of investing. Basically, it advises not to put all your eggs in one basket. It’s one of the basic investing rules for beginners, but it looks different with different types of investing.
Today, we’re tackling real estate investments. It doesn’t matter whether you’ve just purchased your first property or have years and hundreds of properties under your belt. Learning the best ways to diversify your real estate investments will help you make the most of this lucrative financial venture. Let’s dive in!
Invest in Different Types of Properties
First and foremost, it’s time to break up your love affair with just one type of property. Single-family homes are nice, but have you considered diving into multifamily units and vice versa? Or have you dipped your toes into commercial real estate or the ever-popular vacation rentals?
Each property type comes with its own unique benefits and risks. Residential units can provide steady cash flow, but commercial properties might offer higher yields—albeit with a dash of risk. Likewise, vacation homes usually experience slow seasons of little to no booking, but they can provide ample income during their busy months.
If you have a well-mixed portfolio of residential, commercial, and vacation properties, you protect yourself against fluctuations in one market or vacancies in another. Furthermore, you get to experience the benefits of each type of property.
Focus on More Than One Geographic Area
Not only should you have different types of properties, but these properties should also be scattered across the US—or at least across a state. Markets can shift quickly and unexpectedly like a roller coaster, so you want to have roots in different areas to roll with these shifts.
But don’t invest somewhere willy-nilly. Research markets with strong job growth and economic development; these tend to attract tenants successfully and fetch higher rent. Still, this doesn’t mean you shouldn’t invest in quieter areas. For example, a cabin in the woods is a great vacation rental spot and has the potential to be quite lucrative. The key, as you probably have guessed by now, is simply diversity.
Get Involved With REITs
The trouble with diversifying is that it puts more properties on your management plate. You can hire management companies, but there’s still a level of oversight involved. Instead, you can consider getting involved with REITs, which offer the benefits of diversification with none of the management.
Investing in REITs allows you to own a piece of real estate without the hassle of being a landlord. With REITs, you can invest in a variety of properties, from shopping malls to medical facilities, all while reaping the benefits of dividends and potential appreciation. Furthermore, REITs typically perform better during downturns.
You can buy REIT shares outright, or you can get them by participating in a 721 exchange. This exchange lets you contribute some of your properties in exchange for shares in the REIT; this structure is known as an UPREIT. If you’re interested, talk with an advisor. 721 exchange advisors can assist with property selection and any other questions about UPREITs you have.
Explore Other Alternative Investment Strategies
Lastly, REITs aren’t the only type of alternative investment strategy you can try, though they are the most common. You can also consider crowdfunding platforms that let people pool their resources for larger multifamily projects or commercial developments. Additionally, you can consider venture capital-style investments in real estate startups, but bear in mind that this is a high-risk option.
Ultimately, a dash of variety is essential to keep your investment portfolio healthy and protected. The best ways to diversify your real estate investments are to choose multiple property types in many different areas and consider alternative investing strategies, such as REITs, crowdfunding, and venture capital.
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