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Real Estate Investing: The Case for Diversifying Your Portfolio

Andrew Carnegie—founder of U.S. Steel and one of history’s richest men—once observed, “More millionaires have been made through owning real estate than through all other industrial investments combined.”

Owning real estate investments remains one of the most effective means of growing one’s wealth. But to fully take advantage of the opportunities the real estate market affords, those planning on purchasing investment properties should familiarize themselves with the different types of investment products and should spread their investment across several widely different opportunities.

But how? Here are a few core concepts:

What Is a Portfolio?

Investors and industry professionals refer to a person’s collection of investments as a “portfolio.” This is a concept that basically encompasses all of your investments. So, if you own stocks, bonds and rental properties, that’s what your portfolio consists of.

What Is Portfolio Diversity?

A portfolio is “diverse” when the investments it contains vary in relatively equal amounts. Keeping with our above example, a portfolio that is 90 percent stocks, 5 percent bonds and 5 percent rental properties is not diverse. A portfolio with 33 percent of each investment type would be considered diverse.

In the context of a real estate-specific portfolio, diversity means owning several different kinds of real estate investments.

Why Is Diversity Important?

This is a great question that a lot of new investors overlook. Here’s an example that may resonate with many: In 2008, the housing market collapsed. Many people lost their homes, and the average value of those homes went down dramatically. If you were a real estate investor who focused primarily on renting out houses, there’s a good chance you went out of business in 2008.

But, if you were a real estate investor who was also receiving rent from properties associated with unaffected industries—like commercial real estate—you were more likely to survive the collapse.

In short, owning three houses is good. However, owning one house and a grocery store is better because, even if people don’t have the money to buy a new home, they’ve still got to eat.

How Do I Diversify My Real Estate Portfolio?

For the new investor, or for the investor who hasn’t explored much of the market, your first stop should be at the offices of an experienced real estate agent who works specifically with investors. An experienced investment agent can help you find the right properties—and the right balance of properties—to secure your wealth and make you a tidy profit.

This article is intended for informational purposes only and should not be construed as professional advice.

Source: Dixie Somers/RISMedia’s Housecall