Just like any investment portfolio, a real estate portfolio needs to be diversified to protect against downside risk. By investing in a wide range of properties, in different geographic areas and using a selection of investment structures, real estate investors can optimize their yield while reducing the risk of a market downturn. Diversification ensures that if one real estate investment begins to falter, there’s less chance the entire portfolio will suffer.
While diversification in the stock market might seem intuitive, making diversified investments within the real estate world isn’t always as simple. How should real estate investors ensure they are diversifying their portfolio with the appropriate asset allocation?
Real Estate Assets Classes
Single family, multi-family, and commercial properties all represent different real estate asset classes with unique market opportunities.
Single Family Homes
Single family homes represent the lion share of residential homes in the United States. In the aftermath of the Great Recession, home ownership rates tumbled and new housing starts hit record lows, but since the recovery began in early 2010 new housing starts have been steadily on the rise and investor interest has increased as low interest rates and uncertainty in other investment vehicles has encouraged diversification.
Multifamily buildings are a type of residential housing that involve more than two units under the same roof. While they’re not the most common residential buildings, multifamily properties have been in high demand over the last few years. In the aftermath of the recession, home-ownership rates dropped, and the demand for multifamily dwellings swelled as the housing market shifted from ownership to rentership. Demographic trends have also played a role in the growth of multifamily property development. As Millennials seeking jobs has attracted to the younger generation to metropolitan areas, so has an aging Baby Boomer population attracted the older generation to retirement facilities.
Commercial property usually refers to buildings that house businesses, of which there are many unique sectors of commercial real estate including office, retail, industrial, hotel and mixed-use properties. Each sector of commercial real estate is unique with different underlying market fundamentals. From an investment perspective, commercial property has traditionally been seen as a sound investment with higher cash flow than residential property and lower vacancy risk as a result of dealing with companies as opposed to residential tenants.
Marketplace Lending Asset Allocation for a Diversified Real Estate Portfolio
Real estate investing has begun to change dramatically in recent years thanks to the addition of marketplace lending (MPL) platforms like Sharestates. Prior to MPL, if you wanted to invest in multiple properties and didn’t have the capital to build your own real estate portfolio, real estate investment trusts (REITs) were the only available option. Buying shares in a REIT gave you exposure to a portfolio of properties, but individual investors didn’t have a say in the properties that went into the portfolio. MPL allows developers to apply for loans and split the cost of their funding across a crowd of investors. Moreover, the investors control which properties they want to invest in, with the option to choose their own diversification strategy across single family, multifamily and commercial properties, including land.
People who want to invest in real estate can use marketplace lending platforms to start building out and diversifying their portfolio with little upfront capital requirements. Investors can view their portfolio online, and receive monthly interest payments. In today’s real estate market, you should consider diversification not only in terms of real estate asset classes but also in terms of real estate investment platforms that offer the opportunity to invest with the ease of an online brokerage.