Real estate is an excellent way to diversify an investment portfolio, but what happens when the real estate portion of your portfolio takes up the majority of the pie? If you’d like to avoid having too much tied up in a single type of asset, let’s talk about ways you can change your investment strategy.
It’s a given that single-family residential investments can sometimes be tricky. There are ample opportunities to see a positive return with equal or greater ways a good deal can turn bad.
The good news is that there are countless ways to reduce your risk and the likelihood of ending up with a negative return on your rental property. By understanding the top three ways to minimize the risk in your real estate portfolio, you can better direct your investments.
1. Invest in Different Types of Real Estate
There are plenty of different ways to diversify, but the most obvious by far is to add a number of different types of real estate to your portfolio. Instead of investing solely single-family residential rentals, you might also decide to invest in properties like duplexes, apartment complexes, commercial properties, land and lots, industrial warehouses, storage space, or even mobile home parks.
The more you spread your investments across varying types of real estate, the less chance that one bad apple (updated tax laws, a turn in the market, etc) spoils the bunch.
2. Invest in Different Locations
Another way to protect yourself is to develop and expand outside of a single market. Rather than investing in one single town, county, or even state, choose a diverse selection. Each area will have its pros and cons, but there’s no reason not to take advantage of multiple hot spots. New technologies and platforms have made it easier than ever to invest in properties in practically any location in the country.
Remember, when you work with a trusted property management company like Real Property Management Avitus, you can own rental homes anywhere from Houston to Timbuktu. We can work with local owners as well as owners who live both in and outside the state (or country). In fact, this is exactly why many real estate investors choose a property manager.
In this way, you could effectively diffuse the location-based market-related risks and obtain investment properties in some of the nation’s hottest markets simultaneously.
3. Secure Favorable Financing
When it comes to financing, work smarter not harder. If you pay more into your down payment, you can often reduce your interest rate and monthly mortgage payment. Paying cash is another effective approach that may keep future costs low and protect your investment during any real estate market changes.
Another really smart idea is to build relationships with lenders who will work with you to procure favorable terms or brainstorm more creative financing options with you. For example, if you plan to hold a property for less than ten years, you might benefit from an Adjustable Rate Mortgage (ARM). ARMs oftentimes go along with a lower initial interest rate and, improved cash flow for you and the investor. As soon as interest rates drop, take into account whether it is an appropriate time to refinance into higher-interest loans.
Maybe you’re tired of the involvement that real estate requires, but would still prefer to have your money attached to it. REITs, or real estate investment trusts, are long-term investments that typically provide healthy dividends plus the potential for capital appreciation over many years.
With an REIT, you pool your money with a bunch of other investors and gain an ownership stake in different pieces of real estate and developments. While the return isn’t quite as good as if you owned it all yourself, it has the benefit of being hands-off.
In Conclusion
By investing in diverse markets, purchasing with appreciation in mind, and making smart financing choices, you can easily avoid costly mistakes.
Investing, no matter the strategy, asset, or mechanism, can be risky. The key is to take on an appropriate amount of risk, be aware of red flags, and avoid putting yourself in a situation where you could potentially lose everything. On top of that, by spreading your assets across multiple types of investments, you can also safeguard against a sudden downturn in the market.
Do you have one or more investment properties? Then you need to talk to a Houston property manager at Real Property Management Avitus. Contact us online or call us at (281) 570-6357 if you have any questions or needs for your investment property!
Sources:
- 3 Ways to Minimize Risk in a Real Estate Portfolio
- 3 Ways to Reduce Risk in Your Real Estate Portfolio
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