When COVID-19 reached the U.S. in early 2020, no one knew what to expect. The stock market crashed, retail stores shut down, the value of office space plummeted as workers were told to work from home. Black swan events like this illustrate the importance of diversification in your investments and sources of passive income.
In fact, as a result of COVID, apartments became even a better investment. Demand increased and so have rents. The government assisted residents in paying their rent and apartments continued to be profitable.
One of the most powerful strategies to successfully weather economic cycles is diversification. Even within your real estate portfolio, you can diversify and maximize the long-term growth of your investments. Here are four key ways we use diversification in our real estate investment strategy:
#1 Investment Type
Wall Street and wealth advisors tell you to allocate 60% to stocks and 40% bonds. Yet how many direct real estate investments do you own?
There are enormous benefits including the preservation of capital, cashflow, and tax advantages. Yet the typical wealth advisor never receives training on how to directly invest in real estate and they don’t get commission on it. Therefore they do not recommend it to clients.
It is outside of their comfort zone so many investors miss out on the opportunity. Or they “diversify” within the stock portfolio. But true diversification does not mean buying more stocks. When it comes to different types of investments, we believe nothing is as appealing as real estate.
#2 Different Asset Classes
There is more than just one class of apartment properties. Consider diversifying further with different asset classes. An asset class can range from workforce housing to luxury apartment rentals.
By varying the types of properties you invest in, you’re hedging against broader changes to the economy.
Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during booming economic years. If you have both in your portfolio, it is profitable at any given point in the economic cycle.
#3 Different Locations
It’s been said that the three most important things about real estate are “location, location, location.” So how do you determine that location?
For a passive investor, you can spread out risk and invest in different locations around the country. 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.
#4 Invest in Many Deals
Rather than investing a large amount in one deal, consider investing in many different deals. When you invest in multiple opportunities, you are naturally creating diversification in your portfolio.
Consider spreading your investment allocation across many different deals.
Regardless of what happens in the future, whether it’s a booming economy or another black swan event, investing in real estate is an excellent strategy for building generational wealth.
It is a safer asset to place capital, it provides passive income and there is less volatility when compared to stocks and other securities. There are also tax benefits that only real estate can provide.
So as you embark on your real estate investing journey remember to consider these ways to diversify as a real estate investor. Doing so will greatly benefit your ability to build wealth no matter the current market cycle.
When you are ready, we are here to walk you through the investing process with white glove treatment. To get started, join the Investor Circle.