5 Ways To Maximize Growth Through Diversification

by | Feb 22, 2023 | Investing Advice

Have you ever known a new mom? She likely has stashed packages of baby wipes everywhere. In her purse, the diaper bag, multiple places in the baby’s room, in the master bedroom, in the car… it’s likely that anywhere she and the baby might be, a stash of baby wipes is near. The purpose, of course, is to prepare for those unexpected moments that accompany having a new baby. That new mom might not know exactly what to expect, or when a surprise spit-up will happen, but she knows to expect the unexpected.

Diversifying Your Real Estate Portfolio

Similarly, it’s important to expect the unexpected with 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 every so often, 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. Even within real estate, you can diversify and maximize the long-term growth of your investments. By investing in a variety of different real estate assets, you can lower the risk overall.

Outlined below are five strategies that real estate investors can use to diversify their portfolios and hedge against potential risks:

  1. Asset Type: The real estate market offers various types of assets to invest in such as retail, industrial, multifamily, office space, self-storage, and more. By investing in different asset types, investors can spread their risk across a broader range of properties, which can help protect against the impact of broader economic changes.
  2. Location: Real estate markets can vary widely from one location to another. Some areas may be experiencing a boom while others may be experiencing a downturn. Investors can diversify their portfolio by investing in multiple cities, counties, or states to take advantage of potential growth opportunities and mitigate the risk of a downturn in any one area.
  3. Asset Class: Another way to diversify is to invest in a range of moderate-to-luxury unit prices within each asset type. By including a mix of conservatively priced units and luxury properties, investors can balance their portfolio and be well-positioned to succeed during both rough economic patches and booming economic years.
  4. Hold Length: Real estate syndication investments have an associated hold time, which can range from 3-10 years or more. Investors can vary the hold time of their investments, so they’re not entering and exiting more than one deal at a time.
  5. Funds: Investing in a real estate syndication fund is an easy way to diversify quickly. 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.

Conclusion

Investors should keep these five strategies in mind when exploring potential deals to diversify their portfolios. By diversifying across asset types, locations, asset classes, hold lengths, and funds, investors can help protect themselves against potential risks and be well-positioned to succeed in any phase of the market cycle.

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