Diversification in Real Estate

Written By Amelia McGee

Real estate investing offers a multitude of opportunities for wealth accumulation and portfolio growth. However, like any investment, it carries inherent risks. That’s why diversification is a crucial strategy for real estate investors! By spreading investments across various property types, locations, and investment strategies, investors can reduce risks and optimize returns. Here are some key aspects of diversification in real estate:

Property Types

As a real estate investor, you can diversify the types of properties you own. For instance you can invest in a mix of property types such as residential (single-family homes, small multifamily), commercial (office buildings, retail centers, industrial warehouses, large apartment complexes), and specialized properties (hotels, healthcare facilities, self-storage units). Each property type has its own risk-return profile and can perform differently based on economic conditions and market trends.

Whatever the property type, it’s important that you have the right professional tools in place, like landlord insurance and renter’s insurance for your tenants.

Geographic Diversification

The beauty of real estate investing is that you can spread your investments across different geographic locations to mitigate the risk of localized market downturns. Investing in properties in diverse regions or cities can help offset the impact of regional economic factors, regulatory changes, and natural disasters. You might consider populous cities, suburban, coastal, remote settings (think locations near nature attractions) and even international investments!

Managing rental properties remotely is a breeze when you have the right tools in place. Make sure to check out our book, The Self-Managing Landlord, with the chance to win a free copy and free 60-minute coaching call with Amelia & Grace!

If you plan to invest in a variety of geographic locations, you’ll want to make sure you are set up with the right property management software. We love Baselane to keep our banking organized and Hospitable for managing our short-term and midterm rentals!

Market Segments

In addition to geographic diversity, you can diversify your investment based on different market segments within real estate, such as primary, secondary, and tertiary markets. Primary markets (e.g., New York City, Los Angeles) typically offer stability and liquidity but may have higher entry costs. Secondary and tertiary markets may provide higher potential returns but also carry higher risks. We love considering market segements when scouting for midterm rental (MTR) opportunities. Check out our FREE Guide to get started with MTRs today!

Investment Strategies

The world really is your oyster when it comes to diversifying across various real estate investment strategies! You can select from house-hacking, buy & hold, BRRR, short-term rentals, midterm rentals, rent-by-the room, fix-and-flips, real estate investment trusts (REITs), real estate crowdfunding, and real estate development to name a few. Each strategy offers different risk levels, time horizons, and potential returns. Whatever it is, we are big fans of self-managing our portfolios. We even wrote a book about it! You can win a free copy and 60-minute coaching call by pre-ordering our book, The Self-Managing Landlord.

Income vs. Growth Properties

Lastly, take a look at your portfolio and see if you can add some diversification with income and growth properties. We like to balance our real estate portfolios with both income-producing properties (e.g., rental properties, commercial leases) and growth-oriented properties (e.g., development projects, value-add opportunities, appreciation). Income properties provide steady cash flow, while growth properties offer potential appreciation and capital gains.

In general, diversification is a fundamental principle in real estate investment strategy, enabling investors to build resilient portfolios that can weather market volatility and generate consistent returns over the long term. Check out the tools below to help you diversify your portfolio!

RESOURCES:

Amelia McGee
Previous

Adventures in Property Management: 5 Lessons Learned from 4 Years of Self-Managing Single Family Rentals

Next

What to Avoid in a Rental Property