The goal of diversifying your portfolio isn’t to guarantee returns or eliminate risks. It’s purpose is to have a safety net that reduces your potential loss to a certain degree and allows you to set a cap by optimising your returns. Real estate is generally a low-risk and high return type of investment. This is overlooked by some investors, probably because the investment process itself can be rather challenging.
To understand how to make a diversified portfolio, it’s important to know what it “looks” like. A good and strong portfolio has high risk-adjusted returns. This would mean there are assets that you’ve invested which offer the highest possible return at your given risk level. With that being said, careful allocation of your assets is essential when diversifying your portfolio. You want to spread your finances among different categories then further allocate funds within each of those.
MDUs or multi-dwelling units is a type of residential housing that have two or more units under one roof. MDUs are a good starting point if you want to diversify your portfolio. These types of properties have a better chance of having good cash flow and lesser risk when compared to single-family rentals. The reason why it has a lower risk is because of how each type of property generate cash flow. The loss of income is your biggest problem which mostly comes from vacancies in your rental property. Since MDUs have more units, you have a larger pool of tenants and your income doesn’t just stop when a lease moves out. As an investor, you will scale up faster because of multiple streams of revenue within one building.
Although multi-dwelling might seem to be a more favorable option, it wouldn’t hurt to invest in single-family rentals. Investing in these properties are common for those who just started to invest in real estate as well. These properties come with their own benefits. An advantage that trumps that of MDUs is the cash required upfront. Due to their relatively smaller size compared to other real estate properties, they most likely have a much cheaper price. The sooner you start investing, the sooner you enjoy the cash flow. Single family rentals have a much higher demand than MDUs. This results in higher appreciation. To get a better understanding, the value of a multi-dwelling unit is based on the rental income generated. Single-family rentals are valued based on the supply and demand factor – and the demand isn’t lacking at all.
When choosing between the two real estate properties, it all boils down to knowing what their pros and cons are. A good investor’s portfolio considers their preferences, budget, and which property type they want to deal with.
Real Estate Investment Trusts (REIT) have been making huge moves quite recently and they may prove to be a viable option for investment. REITs are companies that own or finance income-producing real estate. Unlike stock market investments, they rely on the state of the real estate market rather than the exchange. If things turn out to be good in the real estate market, so does the performance of REITs. The only similarity is that they offer common shares to the public. You can buy shares in several commercial properties and receive dividends on the rent collected by them. This offers a high potential to see large returns on your investment for minimal work.
To sum it up, your portfolio should reflect a high rate of return year after year coupled with a low risk of losing money. A well-diversified portfolio gives you a good jumpstart in the real estate market. Strategy Properties knows the difficulty in choosing the right diversification strategy so with our years of expertise in the field, we want to prove to you that we are the right choice in order to help boost your real estate portfolio.