Despite the fact that real estate investments have less risk than other investments, investors still look for ways to minimize risk. Reducing the risk in an already low-risk investment will result in a more guaranteed profit from your investments. In any venture a person enters as an investor, the main concern will always be risk and the possibilities that eventually no profit will be yielded. That concern is less prominent with real estate investors, but it does still exist mainly because investors have fears of vacancies, housing bubbles, and other factors. This is why many real estate investors have gone down the path of diversified investments.
Diversified investments are mainly when an investor chooses to distribute their capital investment over a number of assets to significantly reduce the risk rate. In general, diversification of investment portfolios is a popular tactic by investors to ensure that one of their investments booms or brings in major profit. In real estate, there are three major ways for an investor to have a diversified investments portfolio. Investing in multifamily properties, commercial properties and real estate investment trusts are some of the additions made to a portfolio. Each of these strategies has its own advantages and disadvantages.
Investing in Multifamily Properties
A multifamily property or multi-dwelling units is a type of residential property that has two or more living units in the same building. Multifamily properties are the most basic way to diversify investments. After investors have invested in single-family properties, they feel it’s time to graduate to multifamily properties.
- Multifamily properties can have less risk than single-family investment properties because of their lower prices, and because they are more attractive for the majority from the tenants pool. Multifamily investments are also not affected by vacancies because if an investor owns 5-6 apartment units then it is highly likely they will not be affected by clashing vacancies. The more units you own, the easier it is to eliminate vacancy risks.
- Having your investments under the same roof will result in easier property and time management for you personally. If an investor owns an apartment building that has 26 living units, it is still easy to manage the utilities, repairs, insurances and renovations because they are the same property technically.
- Higher appreciation prospects from having multifamily investments is a given. That is because any new upgrade or renovation to the property will result in higher values for each rental unit you own. For example, if an investor decides to make a major upgrade to his/her property by building an outdoor swimming pool that is accessible for all tenants, that results in a huge rise in the appreciation value of all the units in the building. That can be in the form of rental price or selling price.
- There are major tax breaks that are accompanied by multifamily properties. This is a result of owning so many properties that in return, helps the local government with housing issue. It is like an investing incentive scheme from the government that gives people more tax breaks when they are buying many properties.
Investing in Commercial Properties
Using commercial properties as a form of diversified investments is a major investing strategy to escape the competition from the multiple residential investments. Commercial investment is the purchase of properties for the purpose of leasing them for businesses or office use.
- Less competition in commercial properties is certainly a fact considering that most investors don’t think about entering the commercial property sector because it is just outside their experience and comfort zone. Investors who buy commercial property are rewarded with low-risk because they face less chances of vacancy because there is less supply for that type of property. However, beware. When there are vacancies in commercial properties, the vacancies last longer.
- Commercial properties have a major advantage called, Triple Net Lease, which is an agreement that has tenants pay for the property taxes, insurance and any maintenance costs. This is not deductible from the monthly rental price. This allows investors to make more money from rent because they don’t have to worry about all the major expenses involved in a commercial property.
- While the point discussed above is a way commercial properties can help boost an investor’s cash flow and income, there is another boost for cash flow that comes from commercial properties: longer lease terms. Lack of competition also helps because the decreased supply in commercial properties pushes their prices up.
These are the two main and most profitable ways a real estate investor can broaden their horizons to have a more diversified investment portfolio. The concept of diversified investments it to have properties in different sectors of the real estate spectrum so that you can ensure a stable profit and increase in growth year upon year. Commercial and multifamily properties are the next step if you are looking to buy more properties after a successful start. It is important for an investor to not place all their eggs in one basket.