I’ve been buying, renovating, and selling houses for a couple of decades now. In that time, I’ve seen the real estate market hit one pretty awful low and reach some wildly steep highs. But, in spite of some of the extreme scenarios that made national headlines several years ago, real estate market fluctuations tend to be less volatile than that of the stock market. For me, riding out the normal–and occasionally not-so-normal–highs and lows is more than manageable. But, my ability to handle market shifts is not so much because I focus on diversification in my real estate portfolio, which is the usual assumption people make. On the contrary, it’s because I specialize. Let me explain.
Why Investors Seek Diversification in Real Estate Portfolios
Many professionals recommend diversifying your real estate portfolio to help you mitigate risk. That’s why, whether you buy, renovate, and rent or sell in Chicago, New York City, or Atlanta, you’ll often hear others encourage you to purchase some properties to rent and others to sell, not either/or. By acquiring different types of properties with both types of exit strategies, you’ll have a better chance of balancing risk with reward. Or, so the theory goes.
Here’s how they see it: If you are holding a single-family residence or a smaller multi-family property in your portfolio, there’s an opportunity to generate passive income every month after all expenses are paid. So, if it’s a competitive market in which buying and renovating a property to sell seems difficult or impossible due to sagging home prices, too much inventory, and picky buyers, you’ve still got money coming in.
However, if the market tides turn, you can avoid the headache–and pocketbook drain–of empty units by turning to a buy-and-sell strategy. But, if you don’t have a way to find leads on distressed homeowners so that you can balance a downshift in income with returns from the sale of a renovated fixer-upper, things could go from bad to worse fast. Running out of money because of vacancies or unanticipated repair costs puts you at risk of losing your rental properties.
But relying on the conventional wisdom that you’re hedging your bets against market changes by buying some properties to rent and others to sell can blind you to the presence of more immediate, and critical, issues that could affect your bottom line. The location of your assets, cap rates, zoning ordinances, and city codes all matter when it comes to calculating your exposure to risk. Knowledge is power, so you risk more by not thinking critically about the local market, the neighborhood, and how it affects the numbers. Simply relying on multiple investment strategies as your safety net dilutes that power.
Lower Your Risk By Specializing
I’ve found that more than diversifying my strategy, specializing in buying distressed homes and renovating them to sell for a profit offers potentially less risk and more market certainty. The main reason is the short investment time horizon. The typical timeline for buying, rehabbing, and selling a property is between three and nine months and the real estate market rarely experiences significant negative shifts within such a small window. My investment money does its work, then it’s back in my pocket and ready for the next project.
Another way to take specialization a step further, and thereby mitigate potential risks, is to focus your investments on only one or two areas at a time. Too often, real estate investors buy all over the place as another way to diversify. This can be more trouble than it’s worth, especially if you live and work in densely populated areas with a lot of traffic, like Chicago or New York. So, rather than spread yourself, your money, and your time too thin, build your portfolio deliberately and with precision by choosing a couple of up and coming neighborhoods that will benefit from your expertise.
Real estate portfolio diversification, although a popular strategy with some investors, is not critical to weathering real estate market shifts. What really makes a difference in building and maintaining success as a real estate investor over the long haul is you. And, there’s a way you can do it better than anyone else.
A Better Way to Build Your Expertise and Your Portfolio
When I first started real estate investing, my portfolio was all over the place–and so were my profits. I invested in different exit strategies and types of properties, believing I was mitigating my exposure to risk. Then, when things got rough one year because I was holding too many properties that I couldn’t manage and purchased a multi-family money pit, I almost lost everything. Since learning to specialize, however, I’ve been able to reap potential rewards even in the toughest times. The best part is, as an independently owned and operated HomeVestors® franchisee and real estate investment expert, I’ve benefited from the guidance of a seasoned Development Agent who helps me keep my business goals in focus.
Build a strong real estate investment business in any market by starting down the path of becoming a real estate investing expert today. Call HomeVestors® for more information about how to get started with your own real estate investing franchise.
Each franchise office is independently owned and operated.