Diversification of your investments is key to mitigating risk and maximizing returns. That’s because different kinds of assets will react differently to the same event, meaning that an unforeseen circumstance that jeopardizes one type of asset won’t threaten your whole portfolio. For example, if you hold only short-term rental investments in one location and that location’s tourist flow experiences a lull, your entire portfolio will be compromised. But if your assets include long-term rentals as well, these will not be affected, so that while your vacation properties might take a hit, your net gains won’t suffer too much.
There are many ways to diversify your real estate portfolio. Here are just a few examples.
Diversifying your assets – By Type
As previously mentioned, investing in both short- and long-term rental properties is a good way to diversify your portfolio. Another type of real estate investment is the “flip,” where buyers purchase a property and resell it quickly, profiting either from a rapidly rising seller’s market, or by fixing up the property to increase its value.
These different types of investments can be further diversified by type of structure, from single-family homes, to condos and townhouses, to multi-family residences like apartment buildings, semi-detached homes, and duplexes.
Diversifying your assets – By Location
The real estate market is highly variable. Its fluctuations occur not just at the national level, or even state-to-state, but at the regional, city, and even neighborhood levels, as well.
Orlando is an enormous metropolis comprising over 100 distinct neighborhoods, each of which could potentially experience its own up- or downswings independent of the others. So, for instance, let’s say an investor holds two single-family homes in two different neighborhoods zoned for Seminole County Public Schools, recently named the second-best school district in the state. Now, let’s say one of those neighborhoods gets rezoned for Orange County Public Schools, while the other remains in the Seminole County school zone. The home that doesn’t get rezoned will help to offset the loss incurred by the one that does.
By spreading your assets across the greater Orlando area, you can use its diversity to enhance that of your portfolio.
Diversifying your assets – By Holding Period
Another way to diversify your assets is to vary your holding periods between short, medium, and long terms. A short-term holding period likely won’t be subject to any unexpected downswings in the market, but it does come with risk, namely, in that the short timeframe puts pressure on investors to execute their business plans quickly in order to meet their goals. A medium-term period is less risky from a time-intensity perspective, but is more likely to experience a change in the market cycle. Keeping long-term assets mitigates both time-intensity- and cyclical risks, but also brings lower yearly returns. Diversifying with a combination of short-, medium-, and long term holding periods will reduce your portfolio’s overall vulnerability to all of these risks.
As Orlando’s leading real estate investment brokers, with unsurpassed area expertise and local market insight, our Authentic Real Estate Team will help you build a diverse asset allocation model that secures your portfolio against risk and shows lenders that financing your investments is worth their while.