{"id":161008,"date":"2023-10-23T15:52:34","date_gmt":"2023-10-23T21:52:34","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=161008"},"modified":"2024-02-28T13:46:49","modified_gmt":"2024-02-28T20:46:49","slug":"how-the-best-real-estate-investors-diversify-their-portfolios","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-the-best-real-estate-investors-diversify-their-portfolios","title":{"rendered":"Real Estate Isn’t Enough\u2014Here’s How Three Pro Investors Diversify Their Portfolios"},"content":{"rendered":"\n

Real estate investors talk about their real estate portfolios a <\/span>lot<\/span><\/em>. Even in challenging markets, we\u2019re always chasing the next home run\u2014the next amazing off-market deal whispered to us by someone in our network. <\/span><\/p>\n\n\n\n

But what other kinds of investments do real estate investors keep? Especially during periods of turbulence, how do they make the full financial picture all pencil out?<\/span><\/p>\n\n\n\n

We asked three real estate investors, each at different levels of investing, where else they keep their money. Here\u2019s what they said.<\/span><\/p>\n\n\n\n

Rachel Richards<\/span><\/a>\u00a0currently owns two buildings, six units, and 10 syndications (her portfolio brings in about $6,000\/month in profit).<\/span><\/h2>\n\n\n\n

It’s best to not have all your eggs in one basket. My strategy is mostly built around real estate, but I believe in income diversification: having as many streams of income as possible. That way, if one income stream goes away, the rest will keep me afloat. <\/span><\/em><\/p>\n\n\n\n

For example, I currently make $4,000\/month in profits from book royalties and $3,000\/month in profits from evergreen online courses. I also have affiliate income, interest income, and dividend income. They say that the average millionaire has seven streams of income. <\/span><\/em><\/p>\n\n\n\n

BiggerPockets: Can you share an example of when this diversification has come in handy?<\/span><\/strong><\/p>\n\n\n\n

During COVID, many of our tenants couldn’t pay or paid late. We waived all late fees during that time and helped them apply for rental assistance. In March 2020, I made $10,000 in profits. In April 2020, I made $0 in profits. <\/span><\/em><\/p>\n\n\n\n

I didn’t lose money, but I didn’t make money either. And the only reason I wasn’t panicking during that time was because I had my other income streams. You never want to operate out of a place of panic or desperation as a business owner or real estate investor, and <\/span><\/em>diversification <\/span><\/em><\/a>will help with that.<\/span><\/em><\/p>\n\n\n\n

BiggerPockets: What other investments (non-real estate) do you invest in? <\/span><\/strong><\/p>\n\n\n\n

I have a couple of IRAs invested in the stock market and an HSA invested in the stock market. I believe in passive, low-cost index funds and ETFs. So they are invested in things like VTSAX [Vanguard Total Stock Market Index Fund], VTI [Vanguard Total Stock Market Index Fund ETF], IJR [iShares Core S&P Small-Cap ETF], and so forth. Research shows that passive index funds (like the S&P 500) consistently outperform actively managed mutual funds. So why pay a mutual fund manager a higher fee to get a lower return? <\/span><\/em><\/p>\n\n\n\n

Claire Johnston<\/span><\/a>\u00a0is an investor and Realtor in Minneapolis and currently owns three doors. One is a single-family, and the other is a duplex where she is currently house hacking. Her real estate investments gross about $4,000\/month.\u00a0<\/span><\/h2>\n\n\n\n

I love real estate because it gives me immediate <\/span><\/em>cash flow<\/span><\/em><\/a> and additional options beyond a traditional 401k\/IRA to access my gains without the penalties from 401k early withdrawal. But real estate requires more management from me, and with a small portfolio, I am at greater risk of losing money in the short term if something happens to one of my properties [or] I have vacancies. Diversifying with my 401k\/IRA gives me peace of mind that I am still on track long-term for <\/span><\/em>retirement<\/span><\/em><\/a> and negates some of the risks of investing in real estate. <\/span><\/em><\/p>\n\n\n\n

BiggerPockets: Why is it important or necessary to diversify between real estate and other sources of investment income?<\/span><\/strong><\/p>\n\n\n\n

For me, it’s all about giving myself as many options as possible. I think of my 401k as a safe buffer that allows me to take more risk with my real estate investments without compromising my retirement savings. I have a 401k through my W-2 job (both Roth and traditional), an IRA that I rolled all my old jobs\u2019 401ks into, and an HSA\u2014all invested in the most boring and “safe” low-cost index funds\/target date funds.<\/span><\/em><\/p>\n\n\n\n

BiggerPockets: Why these particular investments?<\/span><\/strong><\/p>\n\n\n\n

I read 24 personal finance books the year I turned 27. They all had slightly different advice, but the three consistent pieces of advice throughout all the books were: <\/span><\/em><\/p>\n\n\n\n

1. Max out your 401k (or, at a bare minimum, contribute enough to max out your employer match). <\/span><\/em><\/p>\n\n\n\n

2. Max out your HSA (this money grows tax-free).<\/span><\/em><\/p>\n\n\n\n

3. Invest the money in those accounts in low-cost index funds or target date funds.  <\/span><\/em><\/p>\n\n\n\n

So that’s exactly what I have been doing. Oh, and the fourth piece of common advice was to live below your means so that you can do all of the above!<\/span><\/em><\/p>\n\n\n\n

Jeremy Schneider<\/span><\/a>\u00a0is the co-founder of\u00a0<\/span>Nectarine<\/span><\/a>, a marketplace that connects individual investors with advice-only financial advisors. Schneider owns one home but is invested in about $300,000 worth of syndication deals.<\/span><\/h2>\n\n\n\n

Real estate investing is a lot more work than index fund investing. Additionally, my personal skill set and experience is better suited to earning income in the digital world, so I focus my energy on that and keep my investing very simple and low-cost.<\/span><\/em><\/p>\n\n\n\n

For a couple of years, I flipped homes with a friend, and we held one as an <\/span><\/em>Airbnb<\/span><\/em><\/a> for a year. It all went okay, but I didn’t experience exceptional returns and found it was a distraction from focusing on my strengths. If I were 25 with $10,000 in the bank and lots of capacity to hustle, I’d probably think differently and want to start building up a real estate portfolio.  <\/span><\/em><\/p>\n\n\n\n

BiggerPockets: Why is it important or necessary to diversify between real estate and other sources of investment income?<\/span><\/strong><\/p>\n\n\n\n

I only invest in things that meet two main criteria: <\/span><\/em><\/p>\n\n\n\n

    \n
  1. It pays you income while you own them.<\/span><\/em><\/li>\n\n\n\n
  2. It’s likely to go up in value. <\/span><\/em><\/li>\n<\/ol>\n\n\n\n

    The two big categories that meet that bar are real estate and the <\/span><\/em>stock market<\/span><\/em><\/a>. There are plenty of people who have gotten wealthy with just one or the other, but most rich people I know do both.<\/span><\/em><\/p>\n\n\n\n

     There’s a famous quote from economist and Nobel Prize winner Harry Markowitz: \u201cDiversification is the only free lunch in investing.\u201d If you can get equally expected good returns with less risk, that’s a big win. <\/span><\/em><\/p>\n\n\n\n

    BiggerPockets: Why index funds?<\/span><\/strong><\/p>\n\n\n\n

    Owning an index fund guarantees you the growth and profits of all the companies that make up the economy. I know investors love the term passive income, but investments largely vary in their degree of passivity. However, index funds are as close as you can get: Spend about five minutes on a brokerage website putting your money in and buying them, then do nothing forever.  <\/span><\/em><\/p>\n\n\n\n

    BiggerPockets: What percentage of your net worth is real estate vs. other investments?<\/span><\/strong><\/p>\n\n\n\n

    My net worth of about $4.6 million breaks down as follows:<\/span><\/em><\/p>\n\n\n\n

    Investment<\/b><\/td>Amount<\/b><\/td>Percentage of Total<\/b><\/td><\/tr>
    Stocks and bonds<\/span><\/td>$2,743,824<\/span><\/td>59.1%<\/span><\/td><\/tr>
    Primary home<\/span><\/td>$1,117,000<\/span><\/td>24.1%<\/span><\/td><\/tr>
    Business equity<\/span><\/td>$327,287<\/span><\/td>7.1%<\/span><\/td><\/tr>
    Real estate syndications<\/span><\/td>$309,858<\/span><\/td>6.7%<\/span><\/td><\/tr>
    Angel investments<\/span><\/td>$112,955<\/span><\/td>2.4%<\/span><\/td><\/tr>
    Cash<\/span><\/td>$29,000<\/span><\/td>0.6%<\/span><\/td><\/tr>
    Crypto<\/span><\/td>$2,161<\/span><\/td>0.0%<\/span><\/td><\/tr><\/tbody><\/table><\/figure>\n","protected":false},"excerpt":{"rendered":"

    As the saying goes, don’t put all of your eggs into one basket. We interviewed three pro real estate investors and asked how they diversify their portfolios. Here’s what they said.<\/p>\n","protected":false},"author":613680,"featured_media":161011,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7399],"tags":[],"class_list":["post-161008","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-diversifying-investments"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161008","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613680"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=161008"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161008\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/161011"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=161008"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=161008"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=161008"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}