A strong investment portfolio is a diverse portfolio. This is true of your stocks, bonds, and mutual funds, and it is especially true when we are talking about your real estate portfolio. When you are able to diversify your investment portfolio, you limit your risk. More importantly, you invite a larger number of opportunities.
There are a number of ways to diversify in the current market. Investors may choose to acquire different types of properties at varying levels of risk. Even as a new investor, it’s possible to scale growth and increase returns.
Consider Investing in both Single-Family and Multi-Family Properties
Single-family homes are almost always the investments that owners gravitate towards, and in San Diego, that certainly makes sense. Well-maintained properties in great neighborhoods are in high demand, and tenants are usually willing to pay more for a home with plenty of square footage, outdoor space, and a garage. Single-family homes will do very well in this market, and you can count on their value appreciating quickly over time.
When you primarily invest in single-family homes, one way to diversify your portfolio is by purchasing multi-family homes as well. There are many ways that this can help you earn more with your rental investments. These property types will provide more income for you and less risk. Instead of collecting one rental payment every month, you’ll collect two or three or four. This protects you against vacancy risks. If one unit is vacant, you still have income from the other units.
Lower risk and higher cash flow are excellent reasons to diversify the type of investments you buy. Talk to any San Diego property management company and you’ll find that owning more than one type of rental home is a good way to earn more and risk less.
Diversify Your Investment Financing and Risk Tolerance
Another great way to diversify your real estate portfolio is by experimenting with your financing options.
Many investors pay in cash when they can, and some investors still prefer to take a traditional mortgage. You might find you can get a better deal if you try owner financing. You usually won’t need a large down payment, and if you structure the deal so that you’re primarily or completely paying the principal, you’ll find your cash flow and your ROI can improve quickly.
Consider a 1031 Exchange
You can also use a platform like the 1031 exchange to diversify. This is a great idea for deferring taxes and acquiring new properties.
The 1031 exchange serves an effective and growth oriented long-term investment strategy. When you sell an income-producing property, you need to pay taxes on the money that you earn from the sale. But, if you buy a new investment property – or several properties – that are similar to the one you’re selling, you can defer the payment of those taxes.
This is especially beneficial to investors who would face a large tax bill by selling a property. Let’s say you bought your rental home 10 years ago for $200,000, and you just sold it for $850,000. That’s a huge profit margin, and the money you earn will be taxed.
With a 1031 exchange, you can get rid of a rental property that’s no longer serving your investment goals, but you’re gaining a property (or properties) that can provide better returns.
There are many ways to diversify what you own and what you acquire, and we’d be happy to help you figure out the logistics. Contact our management team at San Diego Residential Property Management.