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Diversify Your Portfolio Through Different Real Estate Investments and Assets

by | Jul 2, 2024 | 0 comments

All markets are cyclical – that includes foreign markets, fixed income markets, the stock market, the real estate market – all of them. And a tried and true piece of advice to protect your investments against the inevitable cyclical changes in a market has always been to diversify your holdings. 

 

But, what does it mean to diversify your portfolio against market risk? 

 

It’s important to note that diversification within a market (let’s take the stock market, for example) reduces asset-specific risk but doesn’t eliminate market risk. This means when you diversify your portfolio across index funds, you’re protecting yourself from owning too much of one stock or going in too heavy on a single index fund relative to other investments.

 

“But what if the market crashes? or we enter a recession?!” you say.

 

Well, to protect yourself from market risk, you have to diversify across markets. This is generally where investors explore fixed-income investments and alternative investments (those that aren’t reliant upon or tied to Wall Street) like real estate, private equity, commodities, and collectibles, to name a few.

 

By investing in a variety of markets and different asset classes, in addition to spreading your capital across multiple long and short-term investments within each market, you’re able to choose investments that are by themselves risky but that average out to be well within your preferred risk tolerance for your portfolio.

 

In an era marked by rapid economic shifts and evolving market landscapes, the sage advice to diversify one’s investment portfolio has never resonated more profoundly. For astute investors like Jen, a tech professional with a keen eye on securing her financial future, the allure of real estate investing shines brightly. Jen’s aspiration isn’t just about accruing wealth; it’s about crafting a life rich with experiences, freedom, and time to explore the world with her family. Real estate, with its myriad of investment opportunities — from multifamily dwellings and select-service hotels to self-storage units and beyond — offers a tangible path to achieving these dreams. This journey into real estate is not just about choosing the right type of asset; it’s about understanding the profound impact of market diversification, or geographic diversification, which underscores the unique nature of real estate as an investment grounded in the nuances of sub-markets.

 

This is why we like to look at different opportunities within real estate to diversify your portfolio.   We’ll start by presenting why real estate is inherently diversified if you are investing in different geographic markets. From there, we’ll look at real estate investments like multifamily, self-storage, select-service hotels, and car washes and why they all offer a unique opportunity to further diversify your portfolio.

 

Key Takeaways:

 

  • Real estate offers a diverse array of investment opportunities that can be tailored to meet individual financial goals and risk tolerances, providing a viable path to financial freedom and lifestyle aspirations.
  • Diversifying across different types of real estate assets — including multifamily properties, select-service hotels, and self-storage facilities — can mitigate risks and enhance the potential for steady cash flow and appreciation.
  • Geographic diversification in real estate investment allows investors to capitalize on the unique characteristics and growth potentials of different markets, further protecting against localized economic downturns and leveraging the independence of sub-markets for greater returns.

 

Geographic Diversification in Real Estate Investing

Understanding Geographic Diversification

Geographic or market diversification is a strategic approach to spread investment across various locations to reduce risk and capitalize on the unique opportunities of different markets. This form of diversification is particularly relevant in real estate investing, where the adage “location, location, location” highlights the importance of geography in property values and investment potential. For passive investors like Jen, who seek to build a resilient and diversified portfolio, understanding and leveraging geographic diversification can be a key to achieving long-term financial stability and growth.

 

The Importance of Sub-markets

 

Real estate markets are inherently local, often breaking down into even smaller segments or sub-markets. These sub-markets can vary dramatically within the same city or region, each with its own growth drivers, economic conditions, and supply-demand dynamics. For instance, a multifamily property in a bustling urban center may offer different risks and returns compared to a similar investment in a suburban area. By diversifying investments across different geographic locations and sub-markets, investors can mitigate the impact of local economic downturns and capitalize on the growth in emerging areas.

 

Why Different Markets Aren’t Related

 

The unique characteristic of real estate markets is that they are not as correlated with each other as financial markets. While the stock market may react uniformly to national economic news, real estate markets respond to local factors such as job growth, population shifts, and urban development projects. This means a downturn in one market doesn’t necessarily predict a similar trend in another, offering a protective buffer for diversified real estate portfolios. For example, while one city may experience a slowdown in the housing market due to job losses, another may see growth due to an influx of new businesses and residents.

 

The Benefits of Geographic Diversification

 

Investing across different geographic locations allows investors to:

 

  • Reduce Risk: By not putting all eggs in one basket, investors can protect themselves against localized economic downturns and real estate market fluctuations.
  • Optimize Returns: Different markets move through their growth cycles at different times. Geographic diversification allows investors to benefit from growth in booming markets while mitigating losses in slower markets.
  • Access More Opportunities: Each market offers unique investment opportunities. Diversification allows investors to tap into various markets’ potential, from high-growth urban areas to stable, income-producing properties in secondary markets.

Broadening Horizons with Geographic Diversification

For passive investors like Jen, aiming for a diversified real estate investment portfolio, geographic diversification presents an opportunity to spread risk and harness the potential of various markets. By strategically selecting investments in different locations, Jen can ensure her portfolio is not only protected against localized downturns but is also positioned to capitalize on the growth and stability offered by different real estate markets. In doing so, geographic diversification becomes a cornerstone of a well-rounded real estate investment strategy, providing a pathway to achieving financial goals and the freedom to enjoy life’s adventures.

 

In the landscape of real estate investment, how might geographic diversification align with your strategy for portfolio growth and resilience?

 

Multifamily Real Estate Investments

 

Introduction to Multifamily Investments

Multifamily real estate, comprising apartment buildings and complexes, presents a robust avenue for investors aiming to diversify their real estate portfolios. These properties not only offer the potential for appreciating asset values but also provide consistent rental income streams. For passive investors like Jen, who prioritize free time and seek to avoid the intricacies of direct property management, multifamily syndications offer a hands-off approach to real estate investment.

 

Risks and Benefits

 

Risks: Market fluctuations can impact occupancy rates and rental income. Additionally, large-scale repairs and maintenance can introduce unexpected costs.

Benefits: Multifamily properties typically generate stable cash flow and might offer economies of scale regarding maintenance and management costs. They also present significant tax advantages, including depreciation.

 

Select-Service Hotels

 

What Are  Select-Service Hotels

 

Select-service hotels, which provide limited dining and amenities compared to full-service hotels, have emerged as an appealing sector within the hospitality industry for investors. These are business-class hotels, not luxury hotels. 

 

These properties often boast lower operational costs and higher profit margins, making them an attractive option for those looking to diversify into real estate.

 

Risks and Benefits

 

Risks: The success of select-service hotels can be highly dependent on economic cycles, with demand potentially fluctuating based on travel trends.

 

Benefits: They require less capital for day-to-day operations and can yield higher returns on investment due to lower overheads. Additionally, the resurgence in domestic travel post-pandemic has bolstered the performance of select-service hotels.

 

Self-Storage Assets

 

Self-storage facilities have risen in popularity among real estate investors due to their resilience during economic downturns and low overhead costs. These assets cater to the ever-present demand for storage solutions, whether from individuals during transitions or businesses requiring additional space.

Risks and Benefits

 

Risks: The self-storage market can become oversaturated in some regions, leading to competitive pricing wars. Additionally, the success of these facilities often hinges on location and accessibility.

 

Benefits: Self-storage units offer a recession-resistant investment option with the potential for steady cash flow. They also tend to have lower tenant turnover rates compared to residential properties, ensuring a more predictable income stream.

 

Car Washes

 

Investing in car washes is emerging as a risk-adjusted prospect for investors looking for sustainable opportunities. With strong industry growth, evolving consumer preferences, and a focus on environmental sustainability, car washes are becoming a hotbed for passive investors

 

Risks: 

  • Competition – When you invest in a car wash, competition is one of your biggest risks. Other car washes can be found in many places, and sometimes right next to each other.
  • Expensive repairs – When pieces of specialized car wash equipment break, it can be expensive to fix or replace them, which can go into your bottom line.
  • Weather – The weather (i.e., rainy weather) is another risk of the car wash business. One bad month or season can significantly affect how much money you make in a year. But this risk potential has been dramatically reduced by the rise of unlimited wash plans, which give operators guaranteed monthly income.

 

Benefits:

  • Passive investment – One of my favorite benefits to investing in car washes is the potential for building passive income streams as they can generate consistent revenue daily. With low initial costs and a short construction time, automated washes can quickly become a passive investment.
  • Increasing demand – There are more rideshare vehicles on the road (Uber, Lyft, etc.), plus more people rely on cars in general, both driving up the demand for car washes.
  • Tax benefits – Another benefit appealing to high-income earners is the tax benefits (depreciation) associated with it.

Why Should You Think About Diversifying Through Different Real Estate Investments

 

Investing across various real estate assets like multifamily properties, select-service hotels, and self-storage facilities allows investors to mitigate risks through diversification while capitalizing on the unique opportunities each sector presents. For passive investors such as Jen, looking to supplement her income without dedicating her time to property management, these investment avenues provide an ideal blend of growth potential and income stability. By engaging with seasoned investment firms like Goodegg Investments, Jen can seamlessly integrate these diverse real estate assets into her portfolio, aligning her financial goals with her lifestyle aspirations.

 

In exploring these diverse real estate investments, have you considered how they align with your financial freedom goals?

To learn more about real estate investing and syndications, reach out to us at https://investwithspark.com/contact/ today!

 

 

 

 

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