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<\/p>\nReal 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.<\/p>\n
The concept of diversification isn\u2019t some newfangled idea or even something that\u2019s specific to managing a financial portfolio. It\u2019s been around for centuries and is frequently used as a form of hedging.<\/p>\n
\u201cHedging 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.\u00a0But hedging is not an investment tool reserved for those who grow corn, wheat, and beans,\u201d says Laura Taylor, a Senior Market Strategist for RJO Futures.<\/p>\n
Whether you\u2019re a farmer or a businessman, it\u2019s always a good idea to hedge your bets and diversify your portfolio in order to enjoy steady returns without succumbing to unnecessary risk.<\/p>\n
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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. This doesn\u2019t 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.<\/p>\n 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<\/a>, you might also throw in things like duplexes, apartment complexes, commercial properties<\/a>, land, industrial warehouses, or even mobile home parks.<\/p>\n 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.<\/p>\n Conventional wisdom says that it\u2019s best to purchase real estate in your local community, especially if you\u2019re 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\u2019t be afraid to change up locations.<\/p>\n 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\u2019t going to be severely impacted by regional slumps.<\/p>\n Maybe you\u2019re 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. 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\u2019t quite as good as if you owned it all yourself, it has the benefit of being hands-off.<\/p>\n Investing\u2014no matter the strategy, asset, or mechanism\u2014is 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.<\/p>\n
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\nRelated:<\/strong> Sequence Risk: How to Ensure Your Nest Egg Doesn\u2019t Go Belly Up Before You Do<\/a><\/em><\/p>\n1. Invest in different types of real estate.<\/h3>\n
2. Change up locations.<\/h3>\n
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<\/p>\n3. Try REITs.<\/h3>\n
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\nRelated:<\/strong> How to Pay Zero Taxes, Minimize Risk, & Keep Your Sanity While Live-In Flipping<\/a><\/em><\/p>\nEliminate Unnecessary Risk<\/h2>\n
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