@Marisa R. That's a great question! You have to define if you're looking at/ talking about diversifying out real estate as an asset class or general diversification. There is a great deal of diversification within real estate that most don't acknowledge but is very real and then there is diversification of asset classes (stocks, bonds, real estate, private equity, etc). Diversification within real estate in very important but often over looked. Below are are some things to think about although there are many more. In general, do your research and stick to what you know and understand (or find someone who does). Also, make sure that it aligns with your life and financial plans.
Type Diversification: Are you holding only one type of real estate?
-Having investments in more than one type of real estate (Exp. residential, multi-family, commercial, retail, hospitality etc) gives you more diversification in real estate and protects you against any market changes that heavily affect one of those classes. For example, you don't want to be a real estate investor who's only invested in retail their entire life and is not getting killed.
Demographic Diversification: Are all your real estate holdings targeting the same demographic?
-For real diversification make sure that your real estate holdings target more than one class of people or demographic. Targeting only lower demographics (Class D/ F properties) can backfire if the people of the area grow out to a higher economic situation and now longer accept lower end buildings. There is generally always someone in need of lower end housing but you have to determine if you want to rent to those people.
Geographic diversification: Are your real estate holdings diversified across different geographic area?
-Investing everything in one city or area can be risky if the economics and growth of that area change. For example, investing everything in a boom town can backfire when the town stops booming and there is no one left to rent your units.
Diversification outside or Real Estate: Look at investing in different asset classes as they may add to your economic security and income potential and could have great tax advantages.
-Stocks: Stocks/ Equities are a bit more complicated than real estate but when done correctly could give you huge gain that are not often seen in real estate. Stocks are a big risk vs reward game but there are many resources that can help you come up with a good investing plans.
-Bonds: Bonds are kinda boring but can provide some good long term income for those who are risk adverse. Municipal bonds also have some great tax advantages that make it worth while for some.
-Private Equity/ Venture Capital: Investing in PE is not for all as they are not simple to find and understand but for the sophisticated (and wealthy) investor you can get into some great PE funds that can produce some huge returns!
-Private Lending: Becoming your own bank can be very lucrative if you know what you're doing and have the time and resources to make sure the debt is being serviced.