Diversify Your Property Portfolio Properly
Diversifying a portfolio means not putting your eggs in one basket but rather minimizing the risks of assets by spreading the money between different kinds of investments. It could be any type of investment; real estate investment, bonds, or mutual funds, would be the investors’ desire to preserve wealth. Growing wealth safely and having an income throughout the market changes are pressing priorities to anyone in the investment game.
We don’t see what will occur or when in the future, however, based on data analysis, we make presumptions of market or at least know recessions and corrections transpire in cycles. So if a recession is not happening now, it means, it will be coming up, and vice versa. If we are in recession today, recovery is coming up soon. Hence, it is necessary to apply all the possible actions to hedge the bets to embrace the stormy times and advance for sustainable growth.
The most potent approach to amplify the long-term growth of the portfolio is diversification.
It is possible to diversify within the property market itself, without attempting to look at other fields such as cryptocurrency or the stock market. The approach is to spend on various kinds of real estate assets and increase the probability of higher returns while lowering the overall risk.
Property values are driven by the commercial interest in an area, and its impact on rents. Residential property values are driven differently, for example by living standards, economic activity, and demographics. While supply is constrained but demand is growing and strong, since everyone needs a roof over their heads. There is a wide range of sub-sectors in the residential sectors, including rental housing (for a tenant), schooling accommodation, social housing and latter living. In the rising regulations, it is increasingly preferred to focus on just one sub-sector or to have expertise on it. Because lack of knowledge threatens more risks and it might outweigh the initial benefits of diversification.
Now at this point, one might be wondering how to effectively generate and maintain a portfolio with adequate asset types, geographies and tenancies diversifications.
While 10 or 20 years back, diversification might have been difficult, but now we are in an era where a lot of things are possible at the click of a button or to come possible in a week’s time. Here, 5 ways to diversify the property portfolio rationally as follows:
#1 – Diversifying By Asset Type
Real estate investment is unique in the way that there are variety of different assets available to obtain. An investor can choose to put in everything from retail shops, to single-family homes; industrial space to large apartment complexes. One can invest in self-storage, warehouse, office space, retail space, rental apartments and more.
There is always value-added and profit gets generated in any asset type. One can hedge against multiple macro changes occur in economy by investing in dissimilar kinds of assets. One big example happening to the world is that retail space need collapse with the eCommerce development nowadays, and office room has shifted in favor of remote work.
#2 – Diversifying By Geographical Location
Real estate value is hyperlocal, implies the locality is heavily influential on real estate price, while one city might be experiencing slowdown, its neighboring town could be booming. Therefore, diversifying across multiple geographies would help to take advantage of ups of certain markets while being stable during downs of other markets whilst hedging the stakes for a major adjustment in any market.
If all of the real estate investments are held within one location’s market, and that market were to experience a crisis, the whole portfolio would get in danger. In contrary, if had one investment in Dubai, another in London, another one in New York, and so on, the unappealing collision to the portfolio would be much more mitigated. What’s more important is that when diversifying through distinctive geographies, one should seek for markets with high population growth, number of jobs and job variety. This will help to ensure that particular market receiving investment is on the progress of growth in the coming ages.
#3 – Diversifying By Asset Class
Asset classes mean horizons of different asset values, specifically a comparison between cheap assets to luxury assets. While diversifying through different asset classes, it’s fundamental to take human behavior during market flips into consideration. For example, let’s take a look at apartments, in good times, people are inclined to buy or rent bigger and more luxurious apartments in better locations. But in rough times, they tend to downsize and get into a lower priced apartment or to move to another city. Some asset classes fare well in bad times and other asset classes could carry well in good times.
No one knows when the next recession will happen, also because real estate is cyclical, ultimately it’s vital to spread the investment across different classes, to make sure the whole portfolio is recession proof and quite profitable in all conditions and parts of the economy cycle.
#4 – Diversifying By Strategy And Hold Time
Another method to diversify a portfolio is to apply hold time and change up the investment tactics. Some rental properties are suitable for buy-and-hold, while some may be fit for buy, furbish, rent out and fund strategy. By investment strategy, it’s armored against downturn even within a single geographical market.
Due to market conditions, hold time might be shorter on certain type of properties and could be on selling in a year or two in different conditions due to the strategy for the particular properties. For others, there could be a longer span and affordable to hold for few years, perhaps could be passed down from generation to generation.
#5 – Diversifying By Active Vs. Passive Investing
Finally, a method called group investments is a great way to diversify the portfolio, while introduces a mix of functioning properties for rentals and passive property syndications.
Smaller residential properties tend to be rental investments, whereas passive syndications are more likely to be larger commercial buildings.
Furthermore, investor maintain the asset of their own rental properties, where syndications allow leveraging the experience with professional syndicators, consequently introduce new strategies to the portfolio.
Like any other market as history shows us, the property market is cyclical. When the market crashes it will pick up sooner or climb back up later, while, it goes up and must come down. The key is to spread the investments as much as possible instead of timing the market. It needs to be spread out into different asset kinds, asset classes, geographical markets and investment strategies to ultimately minimize the potential risks and maximize the profits for the long run.
Start today, by taking professional advises on evaluating real estate investments. Note risks and doles associated with each investment, then assess the portfolio as a whole for possible growth or pitfalls.
If all of the investments are in the single market or geography, no problem. Select from the strategies to diversify the existing portfolio. It is not straight forward to try a new type of investment, however, in the long run it strengthen the overall growth. Get a professional consultation in Dubai’s market from Texture Properties, the top real estate company in Dubai, to mitigate risks of jump starting of a new endeavor today!