How To Create A Diversified Real Estate Portfolio
If you haven't yet invested in your first real estate syndication with us, consider this: It's probable that you're still learning the process, accumulating savings so that you can feel secure as an investor, or maybe you're unsure about which type of asset would be ideal for your first foray into commercial investment property.
Alternatively, suppose you have invested alongside me. In this scenario, it's probable that your worries focus on how to add diversification to your real estate portfolio and what types of assets should be purchased in which order.
So, here's some fantastic news for you!
In this post, I'll walk you through the process of establishing a diversified, complimentary commercial real estate syndication portfolio. So, when you’re finished reading, you'll know exactly what to search for next, regardless of where you are in your investing journey.
Create A Diversified Portfolio Based On Asset Class
The trick is to pick assets that are uncorrelated yet complementary. I've discovered three distinct asset classes that offer a step above the competition based on cash flow, renters' demands, and operator tactics.
I got my start in multifamily property, and over time, I've added self-storage and mobile home park properties. Each distinct asset type has a different target customer, a varying turnover rate, and a unique business strategy for optimum value appreciation.
When you invest in a single property, your risk is concentrated on that one asset. When you diversify your real estate investing power across three or more assets, each of them has less ability to destroy or inflate your wealth. And, to go further, when you diversify your risk across numerous properties in various markets across these three asset types, you've effectively created a truly diversified real estate portfolio.
Multifamily Properties Are an Important Element of Your Diverse Portfolio
Multifamily real estate syndications have long been my favorite due to their distinct place in the housing market: they are more modest than single-family houses, yet more prestigious than mobile home parks.
Multifamily real estate opportunities exist in every city, job environment, style, and demographic in the United States, allowing for diversification within the sector. Apartments are generally classified as A+, B+, C+, or D-class properties and can range from brand-new to neglected and backlogged.
B-class and lower multifamily complexes often have a value-add play as part of their allure. When an operator can step into a community that feels forgotten and revamp the place with fresh fixtures, upgraded amenities, and a new coat of paint, it’s almost certain revenue will rise (which has a positive impact on your investment capital).
Multifamily rental properties generate monthly cash flow from rent income (in addition to a variety of other exciting methods), and turnover is usually on an annual basis as tenant's leases renew.
Self-Storage As A Component Of Your Diversified Portfolio
Self-storage may be an excellent addition to your real estate portfolio once you’ve become comfortable with multifamily syndication opportunities. Self-storage facilities have come a long way in recent years!
You've seen Storage Wars, haven't you?
Today's building management systems offer a plethora of features that include remote monitoring, keyless access to units, centrally controlled lighting and temperature settings, mobile app integration with reservations and check-in/out processes, alarm controls, and integrated services such as garbage collection and maintenance. In some cases, operators have even leveraged technology to efficiently lease and collect fees for their units.
Storage units may turn over monthly as the demands of tenants vary, but it is only necessary to dust off a few cobwebs before re-leasing a unit the same day. While per-unit rent is lower than at a multifamily property, self-storage facilities may easily contain hundreds of units on a tiny plot of ground, resulting in an extremely effective lot size to revenue ratio.
Storage units are available in a variety of sizes, climate-controlled and non-climate-controlled versions, indoor and outdoor access, with or without utilities, and are located in various metro and suburban areas, also allowing for diversification inside the asset class itself.
Invest In Mobile Home Parks as a Diversified Portfolio Component
This suggestion might shock you a little. That's because mobile home communities have had a negative reputation for decades, and it used to be that before you acquired an MHP (mobile home park), you needed to know how you'd sell it.
Now, they're a hot item. As the last rung of affordable housing, with no zoning to build more, mobile home parks are increasingly popular as an investment. In addition, the tiny house trend and housing shortages elsewhere have helped to legitimize the mobile home park asset class as a real estate investor's cash-flowing mainstay.
Residents rely on park ownership to provide maintenance and security within the park grounds since their budget generally only covers their basic living expenses. Therein lies the opportunity for mobile home park owners to make significant improvements with very little value-add capital.
Operators typically convert each lot from park-owned homes to tenant-owned homes, stabilizing revenue while improving employee morale in one fell swoop as part of the business plan. Turnover is generally low, and when done appropriately, mobile home parks tend to cash flow well.
How To Build A Diversified Portfolio With Three Asset Types
You can substantially diversify your portfolio with just these three asset types — multifamily, self-storage, and mobile home parks. In addition, by investing in numerous properties of various classes inside and outside of metros with varying employment possibilities and population diversity, you may spread your risk across all of your syndication investments rather thinly.
This isn't something you can do overnight, but it's essential to have an end goal in mind. If your aim is to establish 20+ syndications across the US that will provide you cash flow and appreciation, you've just discovered a strategic approach to achieve it.
For those who are just getting started, we recommend starting with a multifamily syndication opportunity and adding additional asset types and classes to your portfolio as your understanding of real estate investing grows.