There is a lot of general information online about how to diversify your investment portfolio. But, the truth of the matter is – nobody tells you how to.
Typically, what most investment planning companies would do is give you an outline of your investments. For instance, they may tell you to invest in public stocks or holdings. These are generally low-risk investments. They may also tell you to invest in other private holdings such as private funds or realty.
Here’s the catch – for the long-term returns on your investments, you would also need to diversify within your investments. Or in other words, you shouldn’t be investing in one single product class for any of your investments.
In this article, we would like to shed some light on how you can diversify your real estate portfolio, in particular.
Don’t Just Invest In Residential Properties
Like all other investments, the real estate industry also has asset classes. To better understand this, let us take an example – you are a real estate investor.
Now, let’s say you are investing in multifamily residential properties only. At the best, you can expect double the returns on your investment, per square footage.
But, if you would invest in other properties such as commercial, vacation, or even private equity funds, you can grow your returns exponentially. As “the best real estate services” put it, each different asset class earns different profits during the market cycle. This could also mean that throughout the year, you can expect a constant inflow of cash.
Diversify Your Risk As Well
When diversifying your real estate portfolio, you must not ignore the risk factors involved too. It is noteworthy that every asset class has a different risk rate involved.
For example, residential properties are believed to be perennial sources of income throughout the year. On the other hand, vocational rentals may only be profitable during the vacation seasons.
In a nutshell, you need to allocate your investments in such a way, so as to minimize your risks. A good strategy could be following the 60/20/20 rule. It means, investing 60% of your capital in residential properties, and then 20% each in vacation and private equities. This should keep the cash flow constant while giving spikes of profits intermittently.
Explore And Invest In Other Geographies
Your real estate portfolio is not about investments made in one geographical region only. For a portfolio that proves your worth, you must invest in other geographies as well.
It could possibly mean, if your capital allows you to, you should invest overseas as well. Like the commodity market, realty also varies globally.
On top of that, your investments would also be affected by currency exchange factors and local governance. And if you can carefully blend your risks and asset classes, these should pose no threat to your investments.
Diversifying your investment portfolio is surely exciting. After all, who doesn’t wish their wealth to take an upward hike?
On this note, we hope that you are now prepared to take up the risks. But make sure you diligently consider all the aspects of your investment before putting your money into a new market.
Author Bio: Daniel Brussels is a leading face in the real estate and financial markets. He is passionate about finding new ways to help people grow their personal wealth. Not to mention, he has been awarded as a chief contributor for several magazines and daily locals.