5 Ways To Maximize Generational Wealth Through Diversification
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When COVID-19 reached the U.S. in early 2020, no one knew what to expect. The stock market crashed, retail stores shut down, the value of office space plummeted as workers were told to work from home. Black swan events like this illustrate the importance of diversification in your investments and sources of cashflow.
One of the most powerful strategies to successfully weather economic cycles is diversification. Even within your real estate portfolio, you can diversify and maximize the long-term growth of your investments. Here are 5 key ways we use diversification in our real estate investment strategy:
#1 - Investment type
The typical wealth manager allocates 50% to stocks and the remaining 50% to a mixture of bonds, commodities, and cash. Yet how many direct real estate investments do you own?
There are enormous benefits including the preservation of capital, cashflow, and substantial tax advantages. Yet the typical wealth advisor never receives training on how to directly invest in real estate. It is outside of their comfort zone - so many investors miss out on the opportunity. Or they “diversify” within the stock portfolio. But true diversification does not mean buying more stocks.
When it comes to different types of investments, we believe nothing is as appealing as real estate.
#2 - Different Asset Types & Classes
Within real estate, an investor may be interested in retail, industrial, multifamily, office space, self-storage, and more. By varying the types of properties you invest in, you’re hedging against broader changes to the economy.
Also, there is more than just one class of multifamily property. Consider diversifying further with different asset classes. An asset class can range from workforce housing to luxury apartment rentals.
Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during booming economic years. It’s important to have both in your portfolio so that at any given point in the economic cycle, your portfolio is profitable.
#3 - Different Locations
It’s been said that the 3 most important things about real estate are “location, location, location.” So how do you determine that location?
We believe Indianapolis is the best market in the country right now for multifamily investments which is why we focus there. Indianapolis is also the 4th best market in the nation for rent growth - which increased 3.7% in 2020 where the majority of other cities saw a decline.
For a passive investor, it is imperative to spread out risk and invest in different locations around the country. By diversifying across multiple cities, counties, or states you can take advantage of the potential across several markets and hedge your bets against a correction in any one area.
#4 - Invest With More Than One Operator
The challenge in diversifying across geographical locations is it takes intricate knowledge of the local market and years of experience as an operator.
Rather than “going it alone,” consider partnering with an experienced operator in each market.
Investing passively with different sponsors/operators across different markets is a great way to mitigate risk and diversify your real estate portfolio.
This is what makes passive investing so attractive - you can leverage the expertise of the local sponsor team in each market.
#5 - Invest Smaller Amounts Into More Deals
After you’ve decided on your real estate strategy, city, and operator, you will start analyzing opportunities. Rather than investing a large amount in one deal, consider investing smaller amounts in more deals over time.
Even with the best operator in the world, there are risks with real estate investing. When you invest in multiple opportunities, you are naturally creating diversification in your portfolio.
Consider spreading your investment allocation across 2 or 3 projects.
What’s next?
Regardless of what happens in the future, whether that’s a booming economy or another black swan event, investing in real estate is an excellent strategy for building generational wealth. It is a safer asset to place capital, it provides predictable cashflow and there is less volatility when compared to stocks and other securities. There are also enormous tax benefits that only real estate can provide.
So as you embark on your real estate investing journey remember to consider these 5 ways to diversify as an RE investor. Doing so will greatly benefit your ability to build wealth no matter the current market cycle.