Why it is Important to Diversify Your Real Estate Investments

Has recent storms gotten you thinking about diversifying your real estate investments? With the recent hurricanes in Texas and Florida and even the fires in California it indeed has many local real estate investors thinking. I was talking with an investor client of mine right here in Sarasota Florida who has followed my emerging market investing ideologies for years. While it all sounded interesting to her, she just could not pull herself to investing in areas that she does not live in. She has made many investments over the past couple of years. She has benefited from many diversified investments.

Are you really diversified?

This investor is a very smart investor, she knows she needs to be diversified. She has spread her investments into a broad range of investments. Acquiring buy and holds and fix and flips as well as gaining from pre-construction priced investments and funding flip projects for other investors and even buying notes on properties.

After Hurricane Wilma she discovers she may not be diversified properly

You pretty much know where this story is going. Yes, as she evacuates the state she wonders what she will be coming home to. She now is faced with the realities that every one of her diversified investments may all be hurt or even entirely destroyed if indeed the storm is as destructive as forecasted. She is just one of many investors I have had conversations with in the past several weeks on this same topic.

How diversified are you?

It is common for people to diversify themselves into more tangible investments and real estate is that investment choice for most. It has performed very well over the past several years and this past year the national average appreciation rate was 6.9%. With a 50 year national average rate of around a 6% appreciation rate, real estate is a pretty secure investment.

However diversification is much more than just multiple kinds of investments like paper assets, commodities and real estate. Within real estate, diversification should also be considered.

  • Economically diversified: Are your investment properties located in a variety of cities shielding yourself from local economic challenges? Investors in Motor City (Detroit) a number of years back felt this sting when the auto industry left.
  • Investment class diversified: How many of the same exact investment classes do you own? Single family, multi-family. Residential commercial?
  • Geographically diversified: Are you diversified enough to shield from natural disasters such as tornadoes, hurricanes or earthquakes?
  • Equity diversified: Do you have a large percentage of debt on all you properties? This one hit many people during the economic bust (present company included). During tough economic times do you have enough equity in your properties to weather times of reduced rents and hard to find tenants?

There is a reason the Warren Buffets of the world are successful. They do not invest all their money in one type of investment or in one location. There are always outside influences that can steer the trajectory of your investments. The key is to be informed of what is happening in and around your investments.

Happy investing!