3 Ways to Reduce Risk in Your Real Estate Portfolio
Real estate is an excellent way to diversify an overall investment portfolio, but what happens when the real estate portion of your portfolio gets too big? In order to avoid having too much tied up in a single type of asset, you need to start thinking about ways to change up your real estate investment strategy.
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3 Ways to Diversity Your Real Estate Investments
The concept of diversification isn’t some newfangled idea or even something that’s specific to managing a financial portfolio. It’s been around for centuries and is frequently used as a form of hedging.
“Hedging has always been significant for the agricultural community as a way to protect the producer from price fluctuations or to ensure that they will be able to lock in a profitable price for their crops. But hedging is not an investment tool reserved for those who grow corn, wheat, and beans,” says Laura Taylor, a Senior Market Strategist for RJO Futures.
Whether you’re a farmer or a businessman, it’s always a good idea to hedge your bets and diversify your portfolio in order to enjoy steady returns without succumbing to unnecessary risk.
For a lot of people, real estate is something they use to offset a stock-heavy retirement portfolio. But there comes a point in time where having too much of a single-type of real estate becomes problematic.
Related: Sequence Risk: How to Ensure Your Nest Egg Doesn’t Go Belly Up Before You Do
This doesn’t mean you need to stop investing in real estate, but rather that you should hedge your bets and diversify. Here are some practical ways you can do this.
1. Invest in different types of real estate.
There are plenty of different ways to diversify, but the first and most obvious is to add a number of different types of real estate to your portfolio. For example, instead of just investing in single-family residential rentals, you might also throw in things like duplexes, apartment complexes, commercial properties, land, industrial warehouses, or even mobile home parks.
The more you invest in different types of real estate, the less likely that a single factor will impact your portfolio. It could potentially safeguard you against something like a new piece of tax law or a turn in the market.
2. Change up locations.
Conventional wisdom says that it’s best to purchase real estate in your local community, especially if you’re going to be managing it as a rental property (or some other form of investment that requires regular oversight and involvement). And while, generally speaking, this is a sound approach, you shouldn’t be afraid to change up locations.
By changing up locations and investing in real estate in different cities, states, and even countries, you become much less susceptible to a market downturn. Yes, a large-scale crash like 2008 could still do you in, but you aren’t going to be severely impacted by regional slumps.
3. Try REITs.
Maybe you’re tired of the involvement that real estate requires, but would still prefer to have your money attached to it. REITs, or real estate investment trusts, are good long-term investments that typically provide healthy dividends plus the potential for capital appreciation over many years.
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With a REIT, you pool your money with a bunch of other investors and gain an ownership stake in different pieces of real estate and developments. While the return isn’t quite as good as if you owned it all yourself, it has the benefit of being hands-off.
Eliminate Unnecessary Risk
Investing—no matter the strategy, asset, or mechanism—is inherently risky. The key is to take on an appropriate amount of risk and avoid putting yourself in a situation where you could potentially lose everything. And when it comes to real estate, spreading out your assets across multiple types of investments is the best way to safeguard against a sudden downturn in the market.
How do you manage risk while investing?
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