How to diversify your real estate portfolio? Since the housing bubble in 2007-2008, the economy has recovered very slowly but with steady steps. Nowadays, the US real estate market experiences a 3-4% growth each year. As the economy grows, home prices increase accordingly. For now, the demand for housing exceeds the supply and that is why investors watch the home prices closely and seek to diversify their portfolio by adding more properties in it.
A diverse real estate portfolio ensures you high returns and lower risks. There are key approaches you can take into account for diversifying your real estate portfolio. When creating a diversified portfolio, try to invest in real estate located in different geographic areas taking into consideration which site is best for family houses or apartments. Another way is by investing in commercial properties. This type of investment offers steady cash flows, lower risks, and higher income potential. Because commercial real estate rentals are long term, unlike residential ones, your income is accordingly more consistent.
Additionally, commercial leases have more return on investment compared to traditional real estate. Another concept you will benefit from investing in commercial real estate is called a triple net lease. The term involves tenants paying not only the monthly rent but also property taxes, insurance, and maintenance costs. Although it may seem like a good idea to invest in commercial real estate, you should be cautious about many factors such as the location, type of business, and the area you are investing in.
Another way of diversifying your real estate portfolio is by investing based on risk class. When it comes to risk classes, real estate is classified as core, core-plus value-added, and opportunistic.
Core assets are generally low-risk assets with a lower return on investment as compared to other types. Core-plus assets share many similarities with core assets, except they offer moderate risk with slightly higher yields. Value add real estate investments are associated with higher risks. Generally, there is little or even no cash at the acquisition of property, but you will be able to earn higher returns once the value has been added. Usually, value-add investors tend to use 60% and 75% leverage for the yearly return of 11% and 15%.
The last type is opportunistic real estate investment where the risks are even higher than with value-add investments. These investors take the riskiest projects and may not have any returns on their investment for three or more years. These investments require a deep understanding and a whole team for successful results. Projects that opportunistic investments may include ground-up developments, acquisition of an empty building, or land development.