It is important to not put all your eggs in one basket. it means you should not risk all your money on the success of one asset or business. To overcome this risk, investors go for diversification.
Diversification is actually balancing of riskier investments with less risky ones. A good real estate investor does not put all his investment into one property (asset). Investors look for different types of investments in a certain field depending on many factors, such as: asset type , risks , geological locations , hold time and appreciation etc.
Diversification of real estate portfolio means buying into different types of real estate assets.
Diversification of Real Estate Investments by sectors:
Residential properties are often bought by investors to generate rental income as well as capital appreciation in the long term. Residential properties range from small apartments to multi storey houses.
Industrial properties are used for industrial purposes, such as: production plant , packaging hall or storage unit etc. The lease agreement on these properties is for a longer period than residential properties.
Commercial properties are the ones used for commercial purposes, such as: business centers, offices, shops and malls. Commercial properties are expensive but also have a higher income return.
Investors can also diversify their real real estate portfolio by asset class. It means that investors will invest in similar assets having no dependence on one another. If one asset stops generating income, the other would not be affected.
Diversification in the real estate investment portfolio is also possible by using different types of strategies. Some investors rely on long term strategies while others on short term projects.
There are a number of mistakes an investor should keep an eye for and be careful to avoid those blunders.
- It is important for investors to make sure that their investment portfolio is actually diverse. A truly diverse portfolio includes investments similar but independent of one another.
- Investors should be careful with their investment and not invest more than they afford to lose as it is impossible for anyone to predict the future.
- Investors should always have an emergency exit strategy while investing in real estate.
- Investors often overestimate their skills and lose their investment. Investors should always triple check every contract by a lawyer or an expert. This often happens to new investors.
In conclusion, there are a lot of ways to diversify your real estate investment portfolio. The diversification lowers the investment risks and balances out volatile investments. While diversifying the portfolio, investors should diversify every single aspect of it to be safe.
Investing into REITs can be a safe option for starters but the return over investment is low. Investing into blockchain based real estate platforms is also a good way to diversify the investment portfolio. The blockchain backed platforms have a good return and low fees.