Real estate is one of those golden investment opportunities that never lose their appeal, much like gold itself, for example. When you invest in real estate, you are essentially putting your money into a stable asset class, one with a relatively high ROI potential and a low-risk margin – perfect for novice investors as well as seasoned veterans looking to build financial independence and passive income streams. However, to take your career to the next level, you will need to step out of your comfort zone and diversify your real estate portfolio.
Diversifying in the realm of real estate is the best way to maximize the ROI potential, achieve better returns in the short and long term, and of course, minimize the risk by spreading financial assets across numerous lucrative investments. From buying villas and apartments to diversifying between regions and asset classes, there are plenty of ways to diversify, so here are the five tips you need to take to heart.
Diversify your portfolio based on geography
The first step towards successful diversification, based on your goals, might be to look beyond your local neighborhood or town. We are not talking about international property acquisition, at least not yet. No, right now we are focusing on those lucrative real estate opportunities that may lie in that up-and-coming neighborhood or the next town over. Geography is one of the main factors that influence the value of a property, and thus it can greatly affect the ROI potential of your next investment.
It’s important that you run a detailed SWOT analysis for your business, as well as every primary, secondary, and tertiary market you plan to invest in, in order to gain a deeper understanding of their socio-economic drivers, real estate demand, growth potential, and more. These insights will prove invaluable in your decision-making process and will allow you to make the right decision and invest in a market with the highest potential for long-term ROI.
Consider different asset classes
Every real estate investor has to start somewhere, and chances are that you too have followed the safe route when you were making your first investment – and so you invested in residential properties. Good, depending on the trends and forecasts in your market, this is usually the sensible first step, but now’s the time to diversify your portfolio by investing in other asset classes as well. There are four primary asset classes you need to be aware of: residential (multi-family), office, retail, and industrial.
Depending on the current trends and projections for commercial real estate in your region, you can start looking into lucrative opportunities such as office and retail spaces that will cater to new and established businesses. However, it’s important that you do your research and focus on niche sectors instead of the business industry as a whole – because it won’t do you much good to invest in department stores if companies are looking for coworking spaces.
Venture into the international market
At some point, you need to start looking beyond your country’s borders and set your eyes on some bigger game in the international markets. Investing in property in other countries is one of the best ways to minimize risk and tap into a lucrative market, but you need to research the local laws and regulations regarding property ownership for foreigners in order to make a successful investment with a high ROI potential and avoid legal disputes.
Take the Indonesian market as a good example. Indonesia is a prime investment opportunity nowadays, but foreign investors are being careful to inquire with local investment firms such as Invest Islands in order to learn about the local real estate legislature, and ensure complete compliance with the local policies. Once you have the law on your side, you can go ahead and invest in property in a foreign country and reap the benefits of an up-and-coming international market.
Diversify by analyzing the risk profile
Next, you can diversify your portfolio based on the asset’s risk profile. There are four main risk profiles: core, core-plus, value-added, and opportunistic. As you can tell, these risk profiles work gradually upward from the one with the least amount of risk to the one with the highest risk but the biggest potential ROI. As a general rule of thumb, you should strive to spread your investments across low-risk profiles, while only investing in value-added and opportunistic risk profiles if you have a strategic plan to back you up, complete with extensive funding and a team of experienced advisors.
Invest in REITs and increase ROI potential
Lastly, consider investing in a real estate investment trust (REIT) in order to reduce your financial involvement while potentially producing large financial returns. Succinctly, a REIT operates similarly to stock, where a company owns and operates real estate. You can buy shares in properties and then simply collect the dividends when the property manager collects the rent payments. Keep in mind, though, REITs are vulnerable to drops in share prices, so be sure to do your research and invest when the time is right.
Real estate is a stable investment, but true financial independence and material wealth in the field comes from meticulous portfolio diversification. Use these tips to safely diversify your investment portfolio and maximize the ROI potential across the board.
Alex is fascinated with “understanding” people. It’s actually what drives everything he does. He believes in a thoughtful exploration of how you shape your thoughts, experience of the world.