Real Estate Investing Basics

Real Estate is Crucial to Your Investment Portfolio: Here’s Why

Expertise: Real Estate Investing Basics, Landlording & Rental Properties, Real Estate News & Commentary, Mortgages & Creative Financing, Real Estate Wholesaling, Personal Development, Flipping Houses, Business Management, Real Estate Deal Analysis & Advice
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Financial planners and investment advisors emphasize the importance of diversification in a portfolio of investments, as well they should.

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Diversification reduces the impact of poor performance on the part of any particular company or sector. Diversification also helps the investor achieve balanced results by combining the equity appreciation from growth-oriented securities or funds with the current cash flow provided by income-oriented funds, utility stocks and bonds.

The particular mix of equity and cash flow can be adjusted to the financial needs and goals of the investor.

Similar logic can also apply to buy-and-hold real estate investment. Diversification can provide a cushion against a particular property that performs poorly, as well as balance the overall financial results for the investor.

Benefits of a Diverse Portfolio

First, holding just one property involves much more risk than holding a portfolio of 3, 5 or 10 properties since any given property can perform poorly from time to time due to tenant behavior or the need for capital investment (ex. HVAC system roof, etc.). With a portfolio, the income from the other properties can cover for the cash flow shortfall associated with the problem property.

Related: Real Estate is Better than Stocks – Fact, Not Opinion.

Beyond the obvious benefit of reducing individual property risk, diversification can also help balance the portfolio's results according to the preferences and needs of the investor. Different cities, submarkets, levels of leverage and property types offer varying return profiles that investors can combine to achieve a balanced portfolio with a performance mix that matches the financial target.

Combining Diverse Property Investments

Low-cost properties in more modest neighborhoods may offer exceptional cash flow, but may not have potential to achieve any significant appreciation. Those properties may play a role similar to utility stocks that provide high dividend yields, but often do not promise great growth potential.

Other, more expensive properties in more affluent areas, particularly in cities with strong and growing economies, may offer better appreciation potential, but less substantial immediate cash flow results. Combining property types provides a combination of current income and future equity growth and also provides diversification against the risk of deteriorating property values in a particular submarket.

Related: Passive Real Estate Investments vs REITs

Many investors adopt a strategy of investing in the property type that they find most comfortable, but a diversified approach can provide a cash flow floor for the investor who is looking primarily for gains through property appreciation, or similarly a better inflation hedge for the investor that is primarily looking for current cash flow.

Optimizing the Use of Leverage

With a diversified approach, an investor may also optimize the use of leverage with some simple strategizing. With the current limitation of ten conventional loans, an investor can plan to use financing on the more expensive properties in the portfolio to maximize longterm borrowing capacity.

Leverage amplifies both appreciation and to a lesser extent cash returns. However, it is a mistake to focus on the effect of leverage only on a particular property because at the end of the day, the portfolio will perform as an aggregate.

The cash flow from all of the properties will be used to service all of the debt used to finance the purchase of any of the properties.


A diversified portfolio of properties can provide an investor with steady cash flow and healthy equity growth over time, while maximizing the benefits of applying leverage to amplify results.

Of course, the most important diversification step a savvy investor makes occurs at the first purchase of real property. As BiggerPockets readers well know, a real asset that generates income is a terrific hedge against inflation and almost completely uncorrelated to the volatile stock market.

Do you think real estate is necessary for a fully optimized investment portfolio?

Leave me a comment below!

Ken Corsini is a seasoned real estate investor and business owner based in Woodstock, Georgia. Ken is best known for his role on HGTV’s hit show “Flip or Flop Atlanta,” and has flipped over 800 houses in Metro Atlanta since 2005. With over 15 years of experience in the real estate industry, Ken has expanded his original flipping business into multiple independent real estate businesses, including Red Barn Real Estate, with over 180 agents in Metro Atlanta across four offices; Red Barn Construction, a custom home-building company specializing in modern farmhouses across North Atlanta; Red Barn Renovations, a full-service renovation company; Black Oak Mortgage, a direct lending company based in Woodstock, Georgia; and InvestorSumo, a technology company focusing on CRM and data needs for real estate investors.
    Emmanuel Odum
    Replied over 6 years ago
    Having a mixed bag portfolio is absolutely a necessity for the value investor. And what better way to achieve the much needed financial freedom by adding Real Estate to the portfolio. As a stockbroker in Accra – Ghana, the field of Real Estate never occured to me as an option for my clients who would sell out and be looking for the next best place to invest their money until an indiividual client based in the US brought that to my attention. Now I am jumping ship to get into RE aside my investments in the stock market.
    Jorge Caicedo
    Replied over 6 years ago
    Also, for those of us who don’t want the hassle of owning property, REIT’s can be just as good…
    Jorge Caicedo
    Replied over 6 years ago
    Also, for those of us who don’t want the hassle of owning property, REIT’s can be just as good… Reply Report comment
    Jeff Jenkins
    Replied over 6 years ago
    Unfortunately, I have to disagree with the recommendation of di-worse-ification. Warren Buffet said it best. “Do not diversify. Instead, focus.” Sorry, I’m paraphrasing there. If you’re going to invest in real estate, my favorite investment, simply focus. Pick commercial, single family, or multi-family and become great at it. Keep your ear to the ground and learn to identify trigger signals in the market. REIT’s are also lousy investments. There is no control, cash-flow, or tax advantages. I do agree with Ken that “a real asset that generates income is a terrific hedge against inflation and almost completely uncorrelated to the volatile stock market.” Gotta love it!
    James Pratt
    Replied over 6 years ago
    Great post Ken. When people ask me how many rentals should one own, I tell them no less than 4 for safety. Like stocks that pay dividends, you want a good cash flow coming in every month. I think medium quality homes are the best value. Reason: low inexpensive one means a lot of repairs and turnovers. Where as high value homes renters stay longer but repairs are a lot more expensive as I have found out. Diversifying in stocks to me means you don’t have a clue what to invest in, in real estate it’s a necessity. With real estate I have 100% control over what and how much I make, no correction here!
    Gerardo Alcazar
    Replied over 6 years ago
    Great article. I like learning about the importance of diversification in a portfolio of investments. I’m sure that real estate is necessary
    Frankie Woods Investor from Arlington, Virginia
    Replied about 6 years ago
    Ken, I couldn’t agree more with your article. What better way to protect your investment, and get the best of all worlds than thru diversification! Great stuff!