If the idea of diversifying your real estate portfolio challenges you, we understand. When we talk about it with our own investors and owners, we often evaluate how it differs from our own investment goals and philosophy.
As small, local real estate investors, we started out our investment career by using the principle of leverage. We bought cheap single-family homes and we rented them out. We’ve done well with those. We know how to manage them, and frankly, we have little interest in buying large properties or multi-family buildings as real estate investments.
We have also focused on local investments. Phoenix is a market we understand. We appreciate that we can occasionally drive by our investment homes to see how things are looking.
But, we also recognize that diversifying a portfolio has its advantages. When our clients are ready to think outside of the box, we are prepared to help them.
Diversify to Reduce Risk
One of the purposes of diversification is to spread risk. If that is your goal as an investor, then you will want to look at different types of investments to make up a portfolio. This does not mean you should buy fewer rental homes and put your money into stocks. Every time I have contemplated investing in stocks, I realize how little I know about them and how little control I have over what happens to them.
But, you can diversify within your real estate portfolio. Maybe you have an entire portfolio of multi-family properties and you’d like to start buying single-family homes. That can give your portfolio more stability and potential for appreciation. If you’ve focused on commercial property investment, perhaps it’s time to diversify by acquiring residential real estate.
Diversify Your Funding
Another potential way to diversify your real estate portfolio is by experimenting with your financing options.
Many investors pay in cash when they can, and some investors still prefer to take a traditional mortgage. You might find you can get a better deal if you try owner financing. You usually won’t need a large down payment, and if you structure the deal so that you’re primarily or completely paying the principal, you’ll find your cash flow and your ROI can improve quickly.
Every type of financing comes with a certain amount of risk. Explore all the options and see what you can do to leverage the property you currently own.
Diversify Your Markets
We like the Phoenix rental market for a lot of reasons. If you’re an investor from outside of the area, however, you may be looking for new regions to explore. This is a good idea if you’re located in a market where it’s difficult to successfully buy and rent out a property that earns positive cash flow. A lot of investors from California and New York come to Phoenix for that reason.
Make sure you do your research so you understand the market you’re planning to enter. Always talk to a property management company there.
Single-family and small multi-family properties remain the best estate-building vehicles for the average investor. We are wonderfully positioned to help or advise in the purchase and/or management of these investments. Please contact us at Bennett Property Management.