Diversifying Your Investment Portfolio With Real Estate
Updated: Sep 10, 2019
As the old adage goes, you shouldn’t put all your eggs in one basket — this piece of advice has never been more true than when referring to financial investments. Diversifying your investment portfolio is one of the most important things that you can do, and even some of the world’s most successful companies have had to learn this lesson the hard way.
Take Blackberry, for example, the smartphone company that once dominated the telecom industry in the 2000s. In June 2008, at the peak of their success, their share price closed on a high of $147.55 per share. But just four years later, on September 2012, they had lost 95.7% of their share value, as it plummeted to only $6.30 per share.
The above example is just one reason why diversification is so important. If your stocks, mutual funds, and ETFs decline due to a market crash, do you have another investment in your portfolio that can provide balance?
How to Diversify Your Investment Portfolio with Real Estate
Put simply; diversification is the process of assigning capital in a way that decreases your exposure to risk. The reason behind this is simple — investment portfolios made up of different types of investments pose a lower risk, and on average, yield higher returns.
Real estate rentals are one of the best ways to diversify your investment portfolio — and we aren’t the only ones who think so. In a recent article from US News and World Report titled, “Real Estate May Be a Safe Haven in a Bear Market” Omer Amsel, the founder of StraightUp, a platform which gives investors the ability to diversify into high-growth urban real estate, stated that real estate is an opportunity to “diversify, reduce overall volatility and create a stronger portfolio, offering downside protection among stocks, bonds, and other assets.”
Don Wenner, the Founder of DLP Real Estate Capital, echoed this sentiment in a recent Forbes article when he explained why the current market is ideal for diversification with real estate, “Today, we are experiencing an unprecedented undersupply of housing, a condition that only increases real estate’s value and potential power as a passive income source.”
Passive Income from Real Estate Investment
Not only does real estate investment help to diversify your investments, but it’s also an excellent source of passive income, through rental returns. Passive income in real estate is the rent that the tenant pays each month to the owner. This can be particularly beneficial as an additional revenue stream to save for retirement or reinvest into other investments.
For example, we sold a rental property in Indianapolis for $120,000 which, based on the rents at the time, returned a net 8.05% or 12.02% (if you put 20% down) per year. This means that as long as a tenant is in place, it’s cash on cash net return equates to $811.50 per month or $9,738 per year. According to NerdWallet, the average annualized return on stocks, measured by the S&P 500 index, is around 10%. However, it’s important to remember that the market’s long-term average of 10% is impacted by inflation, which means your purchasing power will decrease by 2% to 3% every year — putting the market’s average inflation-adjusted return at about 7% to 8% annually. This is an excellent example of how real estate investment can help during times of market uncertainty and how it can balance any possible losses from the equity portion of someone’s portfolio.
The bottom line is that no one method of investing is entirely devoid of risk, however minimizing risk through diversification of your investment portfolio is one of the best ways to protect against the turbulence of the stock market.
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All information and materials in this article are for educational purposes only. Opinions expressed in this article are based on information considered reliable, but The Daily Money Show cannot guarantee the accuracy of the information, nor should it be relied upon. The information discussed in this article should not be used as a recommendation to buy or sell securities, nor should it be taken as investment advice. The Daily Money Show is not a Registered Investment Advisor or Broker-Dealer. The Daily Money Show is not an accounting firm and does not give tax advice regarding any security or real estate transaction. You may want to consult with an accountant, attorney, real estate agent, or financial advisor before proceeding with any transaction regarding securities or real estate.