Property Management Blog

How Diversifying Your Real Estate Investment Portfolio Increases Your ROI

Bob Preston - Friday, March 3, 2023
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A diverse real estate investment portfolio will accomplish a number of things for you. There’s a better chance that you’ll reduce the risk that comes with any type of investment. There’s a larger opportunity to get involved with multiple sorts of real estate and even multiple regions and markets. 

Most importantly, a diverse real estate portfolio increases your ROI. 

You’re investing in rental properties because you want to earn money in the short and long term. Increase what you’re able to earn by acquiring different types of properties, and understanding how they can work for you.

Evaluate Your Current Real Estate Investment Portfolio

There are a number of different ways to invest in diverse types of real estate. But first, you have to understand your starting point. What do you own right now? Whether it’s one property or one hundred properties, you need to evaluate your current holdings and look for opportunities to diversify. 

Take a look at what you’re currently investing in. Do they all look the same? Are they mostly single-family homes or small, multi-family buildings? Are they only commercial properties? Vacation rentals? 

The San Diego rental market provides a number of different real estate asset classes for different types of investors. You will have different rates of return on each asset class, and the property type will often determine the rental amount, appreciation estimates, and tenant pool. 

When you invest in one type of property only, you’ll be stuck with the results you’ve been seeing without any potential for growth in new and different markets.  

Many new investors commit to single-family rental homes and feel nervous about venturing out into multi-family properties or buildings. It can seem uncertain. But, if you’re an investor interested in growth, you’ll need to try something different, especially if it serves your investment goals

When you want to invest in different property classes and types, but you feel like you’re outside of your own area of expertise, don’t be afraid to reach out to someone who has a lot of experience with different types of properties. 

Professional property managers in San Diego are a great resource. You can also talk to fellow investors. Educate yourself on the property types you don’t know that much about. Investing in new areas will feel less uncertain.

Diversify Property Type: Invest in Single-Family and Multi-Family Properties 

If you don’t already have a single-family home in your investment portfolio, consider acquiring one. Single-family homes will always make great investments, especially when you’re buying rental property in and around San Diego. These properties are in high demand with tenants and you can charge top rental prices, especially if the home is well-maintained and offers plenty of space, a yard, and a garage. 

A single-family investment property will also appreciate quickly, and you’ll find that the value of your asset climbs reliably year after year. 

But, you don’t want to put all of your money into one property type. We recommend single-family rental homes, and we also recommend multi-family properties when you’re diversifying your portfolio intentionally. 

To diversify your portfolio, consider looking at multi-family properties as well. There are many ways that this can help your portfolio earn more. 

  • These units will provide more income for you because you’re earning rent from several different doors. 

  • You’ll also have less risk of vacancy with multi-family properties. Instead of collecting one rental payment every month, you’ll collect two or three or four. If one unit is vacant, you still have income from the other units. 

  • Multi-family investments also provide discounts on preventative maintenance, pest control, property management, and other services. Your per-unit costs will be lower because you have more units.

Lower risk and higher cash flow are excellent reasons to invest in multi-family homes as well as single-family homes. 

How to Diversify Your Portfolio with a 1031 Exchange

If you’re not sure that you can afford to acquire a new property that’s a different asset class, we have an idea for you. 

Consider a 1031 exchange. Not only do you have the opportunity to buy something new that will add diversity to your portfolio; you can do it without a lot of cash because you’re using the proceeds from the sale of an existing investment property

Added bonus: you get to defer taxes. 

The 1031 exchange serves an effective and growth oriented long-term investment strategy. When you sell an income-producing property, you can use the proceeds to buy another similar income-producing property. It doesn’t have to be the exact same. You can exchange a single-family home for a duplex. You can sell a condo and buy a single-family home. This exchange allows you to diversify without necessarily spending a lot of money.

This is especially beneficial to investors who would face a large tax bill by selling a property. 

It also allows you to let go of a rental property that’s no longer serving your investment goals, allowing you to gain an investment (or investments) that can provide better returns. 

Let’s take a look at an example: Maybe you have six rental units in a small building, and those properties are beginning to need a lot of repairs. You know that all of your investments are small apartment buildings of this size, and you’d like to buy something different. 

The market is in a transitional period right now, and mortgage rates are high. How will you finance that new property?

Well, with a 1031 exchange, you’ll sell that six-unit building and use the money to buy a single-family home or maybe a condo in a new construction HOA neighborhood. 

Not only are you unloading a property that’s not working great for you, you’re also diversifying your portfolio.

Investment PortfolioThere are some great ways to bring new property types into your investment portfolio. You can also diversify by investing in different neighborhoods and markets. You can switch up the way you finance your property investments. 

If you’d like some ideas, we can always help. Contact our team at North County Property Group, and we’ll talk about how to diversify your portfolio in San Diego.

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