How do I diversify my real estate portfolio? What you need to know

Diversification is a strategy used by investors to support long-term gains by potentially reducing the risk of loss. It involves investing in a variety of asset types, so your portfolio is not concentrated in a single area for income or appreciation. While this term can apply to many types of investments, such as stocks or bonds, it can also specifically relate to real estate portfolios.

Diversification in real estate investments is essentially spreading your investments across different types of real estate assets, locations, and strategies in order to help mitigate risk and increase potential returns over time. Instead of allocating all of your money into one type of property, such as a single rental home in one city, diversification can help balance your exposure and create more room for potential growth. This way, if one property type or market suddenly underperforms, others may help offset the losses.

If you are investing in real estate, it is important to be aware that each investment comes with its own set of risks and challenges. Unique timelines in terms of buying, selling, transaction costs, maintenance, management, personal biases, and other factors can impact your portfolio and potential gains.

Real estate diversification is therefore crucial to help you mitigate potential risks in several ways. By spreading your investments across different property types, locations, and other investment types, you can help reduce your exposure to local market conditions, like localized market downturns. Furthermore, having several investment properties can help provide more streams of income. This way, you won’t be as affected if one property faces significant losses. Finally, maintaining a diversified real estate portfolio can help balance long-term appreciation with short-term cash flow.

Diversification matters because it can help reduce your portfolio volatility while ensuring you are still benefiting from market returns over the long run.

Understanding diversification is just the first part of the equation. Now it’s time to look at your personal investment goals, current financial situation, and investment risk tolerance to help you begin the diversification process.

Every investor has a unique journey where different levels of risk and investing varying amounts of money come into play. Since your investment goals may change over the course of your life, it can be important to regularly reassess and rebalance your portfolio as needed.

When it comes to diversifying your real estate portfolio, there are many things to consider, including property type, location, risk levels, and more. You can use these categories to help you create a portfolio that reflects your investment goals. 

Here are some strategies that can help:

There are many types of properties available to invest in, such as residential, commercial, industrial, retail, or even luxury properties. Each property type has a unique reaction to market cycles and economic conditions, so investing in a mix of properties can help bring more balance to your portfolio. 

• Rental properties are often viewed as more stable investments with steady demands. 

• Industrial or commercial properties can potentially offer higher returns, but often come with larger risks. 

• Retail properties bring another layer of diversification, as they may provide higher rental yields but are often affected by economic cycles. 

• Luxury properties may also provide higher returns than basic residential properties but can also pose greater risks.

Diversifying by property type also allows you to benefit from different tenant groups. 

• Residential properties tend to cater to individual tenants or families.

• Commercial and industrial properties usually target businesses.

• Luxury properties often attract a unique demographic.

Having a variety of tenant types can help further stabilize your income stream and support your portfolio through varying economic conditions and tenant demands. It is important, however, to consider the amount of risk you are willing to take based on each property type and be aware of potential losses that may occur.

Another approach to real estate diversification includes investing in properties across different geographical locations. This method can help mitigate risk from local economies, market saturation, or even natural disasters.

If you invest in multiple property types in one area and the local economy suddenly takes a hit or a natural disaster strikes, leaving significant damage, you might face a hefty loss. Spreading your properties across various locations can help ensure your portfolio is not too reliant on a specific place.

Furthermore, broadening your geographic range of real estate investments can also help you take advantage of emerging markets and potentially benefit from higher growth potential or returns. You could also consider balancing high-demand areas with options that are more affordable, or investing in a mix of urban and suburban properties for further diversification. 

Location diversification can essentially help protect you against local market downturns or natural disasters, enter emerging markets, and even help mitigate losses from regulatory changes or tax policies. Spreading your investments across a greater geographical range can help provide a buffer against local risks and mitigate losses from changes in single locations.

However, you might want to do some research on locations you are not too familiar with before making any big investment decisions. You might even want to consider getting professional advice or speaking with a financial advisor to help determine the best strategy for you.

Real estate investment trusts, also known as REITs, are companies that own, operate, or finance income-producing real estate across a variety of property sectors. REITs allow individual investors to earn a share of the income generated through commercial real estate without actually having to buy, manage, or finance property directly.

Many REITs are listed on major stock exchanges, meaning you can buy or sell them using a brokerage account or robo-advisor just like regular stocks. This option makes them one of the most liquid real estate investment options available.

There are many types of REITs available on the market — from residential buildings and apartments to hospitals or even data centers — meaning you can invest in a variety of property types. REITs can therefore help further diversify your real estate portfolio and also provide more liquidity compared to other real estate investments.

However, it is still important to look into specific REITs and market conditions to be aware of possible losses you may face.

If you are looking to balance potential returns with your risk tolerance, you may also consider using a risk allocation strategy. This can be done by distributing your investments across real estate assets that fall into varying risk categories — low, medium, or high risk. This can help create a well-rounded portfolio and offer more stability and potential growth. 

The percentage you allocate to each risk level should, however, depend on your overall investment goals, time horizon, and risk tolerance. While investing across different risk categories can help further diversify your portfolio, you want to ensure you’re financially comfortable with potential losses you may face with higher-risk investments. 

For example, a conservative investor might lean heavily towards low- and medium-risk properties, while an aggressive investor might allocate more weight to high-risk opportunities. In contrast, an extremely conservative investor might eschew real estate investments altogether.

Overall, you might want to weigh the risk and potential rewards when choosing your investments.

You should now be aware of different strategies that can be used. Diversification can be done using one single approach; however, you can also combine different strategies to make your portfolio even more diverse. The best diversification strategy is the one that aligns with your individual situation and goals.

A diversified real estate portfolio can help reduce the risks associated with property investments, and spreading your investments across multiple areas can help further mitigate potential losses. Having different property types throughout different locations, or even investing in various types of REITs, can help ensure you don’t put all of your eggs in one basket and face major losses in a sudden economic event.

Regardless of which strategy — or strategies — you choose, you should always consider how much you can invest and how much you are willing to lose without derailing your current financial situation. If you are unsure about how to best diversify your real estate assets, you might want to consider seeking professional advice.

If you want to maintain a well-rounded, diverse portfolio, you might also think about diversifying beyond real estate investments. Like mentioned above, while you want to avoid putting all of your eggs in one basket when it comes to real estate investments, the same can apply to your investment portfolio as a whole.

Having diverse investments can help you balance potential losses and mitigate economic downturns. You may also want to consider rebalancing your portfolio and shifting your asset allocation as your life evolves. Investing across multiple asset classes — from real estate to stocks and bonds or other alternative investments — can help reduce your overall portfolio risk. You might also want to consider diversifying across all asset classes to help further minimize these risks.

Another option may be considering adding lower-risk, more liquid options to your portfolio. High-yield savings options — such as certificates of deposit (CDs), high-yield savings accounts, or money market accounts — allow for more flexibility while still providing growth potential.

Often offering higher interest rates than traditional savings accounts, these high-yield savings options allow you to grow your money and still have liquidity in case of an unforeseen event. The Raisin marketplace gives you access to all of these savings options with competitive interest rates. Compare account types all in one dashboard and start growing your money today.

Real estate diversification can offer several benefits to investors and help mitigate potential losses. It is important to conduct extra research before making new investments to be aware of possible disadvantages associated with that investment. You may want to consider your financial situation, risk tolerance, and investment horizon when diversifying your portfolio.

If you are looking for other ways to add to your cash flow or simply want more liquidity in your portfolio, Raisin is here to help. The Raisin marketplace gives you access to a variety of high-yield savings products with competitive interest rates to help maximize your savings potential. Sign up today and start growing your funds!

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.