What does it mean to diversify a portfolio?
When we’re talking about general investments, you hear advice to diversify all the time. Usually, this means not putting all your money in one stock or mutual fund. Investment professionals will recommend that you buy assets such as real estate.
But even your real estate portfolio needs to be diversified.
It protects you, for one thing. A collection of investment properties made up of different property types, different markets, and different income streams can ensure you aren’t devastated financially if there’s an unexpected dip in one aspect of the real estate market.
There’s also the potential to earn more money when you’re working with a diverse portfolio of properties.
A good Golden property management partner will help you leverage the investments you currently own, and show you how to make more money with them and grow your portfolio. The money you can earn from your properties goes well beyond the rent you collect every month. Understanding where to find the best opportunities will help you make more money, too.
If all of your rental properties are single-family homes in one single neighborhood, for example, what would happen if the city decides to build a highway through that neighborhood? That could seriously damage the value of your portfolio, and you wouldn’t have any other investments to help you cushion the blow.
Keep your risk low with a diverse real estate portfolio.
In today’s blog, we want to show you some of the best ways to diversify what you own and what you acquire.
What Types of Golden Investment Homes are in your Portfolio?
The fastest and most obvious way to diversify your real estate portfolio is to introduce different types of properties into the mix.
Take a look at what you’re currently investing in. Do they all look the same? Are they mostly single-family homes or small, multi-family buildings? Are they only commercial properties? Vacation rentals?
It’s time to take a broader look at what you can and should buy.
Evaluate all the different real estate asset classes available in the market. Each market offers different rates of return on the various types of properties that exist there. If you have all of your investments in just one type of property, you’re going to be stuck with the way your market is treating those particular assets at any given time.
Many new investors commit to single-family rental homes and feel nervous about venturing out into multi-family properties or buildings. It can seem uncertain. But, if you’re an investor interested in growth, you’ll need to try something different, especially if it serves your investment goals.
When you want to invest in different property classes and types, but you feel like you’re outside of your own area of expertise, don’t be afraid to reach out to someone who has a lot of experience with different types of properties. Professional property managers in Golden are a great resource. You can also talk to fellow investors. Educate yourself on the property types you don’t know that much about. Investing in new areas will feel less uncertain.
A Tool for Investment Diversification: The 1031 Exchange
If you’re looking for an easy way to diversify your portfolio, consider a 1031 exchange. Not only do you have the opportunity to buy something new – you can do it without a lot of cash because you’re using the proceeds from the sale of an existing investment property. You even get to defer taxes.
The 1031 exchange serves an effective and growth oriented long-term investment strategy. When you sell an income-producing property, you need to pay taxes on the money that you earn from the sale. But, if you buy a new investment property – or several properties – that are similar to the one you’re selling, you can defer the payment of those taxes.
The term similar doesn’t mean the same. It means you can’t sell a rental home and buy yourself a vacation condo. You can exchange a single-family home for a duplex. You can sell a condo and buy a single-family home. This exchange allows you to diversify without necessarily spending a lot of money.
This is especially beneficial to investors who would face a large tax bill by selling a property. It also allows you to let go of a rental property that’s no longer serving your investment goals, allowing you to gain an investment (or investments) that can provide better returns. Here’s an example: Maybe your units in a small building of six properties are in need of a lot of maintenance, and you don’t want to invest in the work. Sell that building and buy two single-family homes. Not only are you unloading a property that’s not working great for you, you’re also diversifying your portfolio.
Consider a New Rental Market – like Golden, Colorado
You can also diversify geographically.
It’s easier than ever to buy investment properties in a state or city outside of your own. With technology, you can take online tours and video walk-throughs of a property. You can talk to local experts in that area about what you’ll earn in rent and how large the tenant pool is.
Deciding to invest elsewhere diversifies your portfolio and opens up a lot of doors.
Golden is a growing and popular rental market right now. Neighboring communities like Wheatridge, Morrison, Lakewood, Arvada, and Genesee also attract a lot of interest from investors, especially those coming from markets that are less stable and more expensive to enter.
It’s easy to invest in your local market. But, if you keep all of your real estate investments in one place, you’ll face a loss if the local economy collapses or something happens in the community that causes housing values to plummet. If a major employer in your city leaves the region or the population starts to move out or the local economy shifts, you might be left with assets that are no longer worth what they once earned. These are factors you cannot control.
Think about new markets and different locations. When you’re willing to buy in new markets, your entire real estate portfolio won’t be dependent on a single economy or a single tenant pool. You will be better prepared to endure any potential downturns there because you’ll have investments elsewhere.
Golden is certainly an area to look at if you’re hoping to diversify outside of your existing markets. Our economy is stable and the job market is strong. Tenants are well-qualified and there’s a high demand for good rental housing. The Colorado School of Mines is one of the biggest reasons why rents are good in this area. The students tend to be studious, respectful, and take care of the rental properties.
Golden Property Management is a Great Starting Point for Diversification
Making changes to the way you’ve always done things can be a bit unsettling. Buying a rental property in a market that you don’t know very well will require some research and education. Choosing to buy a handful of units in a small multi-family building can be overwhelming if you’ve only invested in single-family homes before.
Luckily, you don’t have to do everything yourself. Smart investors don’t hesitate to surround themselves with experts. You should do the same.
Avoid the potential mistakes of trying new things by working with an outstanding local property management company. A good relationship with the right property managers will immediately connect you with a network of vendors, brokers, mortgage professionals, and other experts. You can use those tools and resources to have a more successful and comfortable investment experience, even while you’re diversifying.
Being innovative and creative will help you as a real estate investor. You’ll have a stronger portfolio. Whether you’re new to real estate investing or you’ve been slowly growing your portfolio for decades, don’t get stuck in a rut. Doing the same things and buying the same properties will only lead to stagnation. Remember the value in diversifying your real estate assets, and make sure you do all the research and due diligence you can before you enter a new market, buy a new type of property, or adjust your comfort with risk.
We always recommend you reach out to Golden property managers before you buy an investment property. Don’t wait until you’ve closed on the deal. You’ll need insight into the market and how it will match your investment goals. You’ll know how much rent you can expect to earn, what types of repairs you’ll have to make, and how you should budget for ongoing maintenance issues, based on the age and condition of any asset you’re thinking about adding to your portfolios.
We get excited when the investors we work with are willing to try new things. We follow the trends of the local real estate market carefully, and we can help you make smart decisions when it comes to diversifying your existing portfolio or putting together a new portfolio that covers a lot of different property types.
For some more advice on how to succeed with a diverse investment portfolio, please contact us at Laurel Property Services, Inc. In addition to providing property management in Golden, we also serve Wheatridge, Morrison, Lakewood, Arvada, and Genesee, CO.