Many investors use real estate as a tool for diversifying their larger investment portfolio. But did you know that it’s also possible to diversify within the real estate asset class itself? There are plenty of different options, and you’d be wise to consider each of them.
The Power of True Diversification
When it comes to diversifying, you’ve probably been told it’s a good idea to put your money into multiple asset classes. For example, it’s smart to have money in stocks, bonds, real estate, precious metals, and possibly even cryptocurrency. But this is just one form of diversification. If you want to create a truly diversified portfolio that’s insulated from unnecessary risk, you should also consider ways to diversify within each investment class – including real estate.
Think about it for a minute. You don’t put 100 per cent of your stock investments into a single stock, like Amazon. No – you most likely spread your retirement accounts across a handful of large funds. And within each of these funds, there are hundreds of different individual stocks.
The question is, are you doing the same for real estate? If 100 per cent of your real estate investments are in one single-family rental home, you’re taking a huge bet on one piece of property. In order to truly diversify, you should spread out your real estate investment funds among several different properties and investment types.
5 Real Estate Diversification Options
While everyone is focused on single-family rental properties, the reality is that there are plenty of different ways to diversify within real estate. Here are just a few:
- Short-Term Rentals
There’s something nice about having long-term rental properties in your portfolio (meaning properties with leases of 12 months or more). However, don’t discount the benefits of short-term rentals, like vacation rentals or Airbnb properties.
“While managing our firm’s portfolio of vacation rentals, I’ve seen how easily hosts can make three times more on short-term rentals compared to what they would make with long-term rentals in the same space,” author and investor Ali Jamal writes. “When this rental is located near a popular event space, such as an arena for hockey games or an outdoor space that hosts annual festivals, profits can soar even higher — up to 10 times as much.”
As Jamal alludes to, the success of short-term rentals is highly dependent on location. Having said that, you can turn a nice profit in any market as long as you purchase at the right price. As the saying goes, you make your money when you buy.
- Senior Housing
While most people are focused on single-family properties, there’s a massive opportunity that almost nobody is talking about. And while the average person is twiddling their thumbs and contemplating buying a rental property, savvy investors are gobbling up senior housing investments.
“Crunch all the relevant numbers and it will quickly become quite clear that 2021-2022 and possibly the years and even decades to follow represent a potentially golden opportunity to establish a position in the growing asset class that is senior housing,” Crown Commercial Property Management points out.
As the population ages and millions of boomers need long-term care, senior housing demand will skyrocket. At the moment, there isn’t nearly enough supply to meet this demand. This will create insane stability and high prices – a perfect storm for those who hold investments in this class.
Real estate investment trusts (REITs) are great for people who want exposure to real estate but don’t want the stress and responsibility that comes with being a property manager or owner. These are basically mutual funds for real estate. But instead of the fund owning stocks, it owns hundreds or thousands of income-producing properties. Each quarter, investors get a dividend payment. It’s a good idea to have a percentage of your real estate investments in REITs.
- Multi-Family Properties
With multi-family properties, such as duplexes, triplexes, or even small apartment buildings, you benefit from economies of scale. You’re able to generate multiple streams of income on a single property while keeping costs lower on a per-property basis. There’s also less risk associated with owning the property, as a single vacancy doesn’t strip you of all your cash flow.
If you want a non-traditional cash-flowing real estate investment, consider timberland. With this investment, you buy a raw land and use it to grow trees that eventually get harvested as timber. This is a long-term investment – meaning you might have to wait 20-plus years for trees to mature – but it doesn’t require much upkeep either. It’s a solid addition to a growing portfolio.
Grow Your Portfolio
As you grow your real estate portfolio, prioritize true diversification. This means spreading your investments out across different types. This includes short-term rentals, senior housing, REITs, multi-family properties, and even timberland. You can also diversify by geography, strategy, and hold time. The more you layer different elements in, the safer your portfolio will become. You won’t be able to do this all at once, but you can make it happen with time.