by Joe Firmin 2-Minute Read
Be Prepared. The Boy Scout Motto. Have you ever known an Eagle Scout? You know – the highest “rank” in Boy Scouts of America organization? They’re typically prepared for “any old thing” as the BSA founder Robert Baden-Powell famously said.
The purpose, of the motto of course, is to help absent-minded and immature boys to start thinking for themselves and get them to think ahead of what might be coming. They need to expect the unexpected.
Diversifying Your Real Estate Portfolio
Similarly, it’s important to expect the unexpected with your investments and in particular, within your real estate portfolio. We can’t predict the future market, but, based on historical data, we know to expect cycles. Market corrections and recessions occur from time to time, so it’s important to prepare your portfolio to withstand those fluctuations.
One of the most powerful strategies used to successfully weather economic cycles is diversification. Not new news… I know hard-hitting analysis here. Even within real estate, you can diversify and maximize the long-term growth of your investments. Like a Boy Scout getting a variety of different merit badges, you can invest with variety in mind and lower your overall risk. Here are 5 ways to do it:
#1 - Asset Type
Within the real estate world, there are a variety of asset types to choose from. You can invest in retail, industrial, multifamily, office space, self-storage, single-family homes and more. By varying the types of properties you invest in, you’re hedging against broader changes to the economy.
#2 - Location
At any given time, one city might be booming while a neighboring area may be experiencing a downturn. By diversifying across multiple cities, counties, or states you can take advantage of the potential across several markets and hedge your bets against a correction in any one area. Some markets are good for long-term appreciation and others are great, solid, cash-flow markets.
The challenge in diversifying across geographical locations is obtaining the research, connections, and more that you’d need to feel comfortable investing in them. This is what makes passive investing so attractive - you can leverage the work and expertise of the sponsor team.
#3 - Asset Class
Aside from asset type, there is also asset class, which is a range of moderate-to-luxury unit prices within each asset type. Take an apartment complex, for example, and consider the range between moderately priced units, nicely developed units for the upper-middle class, and finally, the ultimate luxury apartments that are available in some areas.
Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during the so-called booming economic years. It’s important to have both in your portfolio so that at any given point in the economic cycle, your portfolio is profitable.
#4 - Hold Length
What’s the saying by Roy Rogers?
“Don’t wait to buy real estate. Buy real estate and wait.”
Real estate syndication investments have an associated hold time which can range between 3 -10 years (or more). Consider varying the hold time of your investments, so you’re not entering and exiting more than one deal at a time.
#5 - Funds
One of the easiest ways to diversify quickly is to invest in a real estate syndication fund. A fund pools together investors’ money to buy a variety of assets within a specified period of time. Funds can be defined by geography, asset type, or asset class.
Expect the unexpected. Be Prepared right? At certain points in the market cycle, it will feel as if the market will go up forever. Conversely, it may feel like the market will continue a downward spiral forever. We know that neither of these are true and that during one phase of the cycle, portfolios should be diversified in preparation for the next phase.
Keep these 5 ways to diversify in the back of your mind as you explore potential deals. Doing so will help you find various opportunities to diversify your portfolio, no matter the current market cycle.
If you’re interested in learning more about investing in value-add investments and becoming a passive investor in real estate syndications, consider joining the Freedom Network. It’s absolutely free to join with no commitment necessary, seriously. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today! Not sure how it will work? Check out this post to understand the logistics.