Real estate investment can be a very lucrative investment strategy for anyone who has the capital to invest and time to manage their investments. There are even those who’d go as far as saying that you can never go wrong with real estate investments because the land will always be there no matter what happens to the economy. But this is not true.
As with any form of asset investment, you still have to be careful with your real estate investment decisions. You can still lose a lot of money if you invest a ton of money in a property when the market goes into a long slump.
One of the crucial questions in real estate investment is whether you should keep going with what you have or start looking around to diversify. There are numerous investment outfits like Peregrine Private Capital and other similar firms who share their thoughts on how to figure out whether or not you’re ready to diversify your real estate investment portfolio.
Here are a few signs that you might just be ready to diversify your portfolio of real estate investments:
1. You’ve Taken Care Of Your Retirement Pension
The core foundation of any investment and financial plan is your savings and investment for retirement. Financial planners would say that you should already have substantial investments and savings for retirement before you start working towards real estate investments. If you still have significant cash flow after setting up your retirement fund, then you can start thinking of investing in real estate.
It’s highly important for you to set aside money for your retirement. A lot of people often delay and postpone the need to set aside money and investments for their retirement, hoping that they’ll somehow just come up with a lump sum for their retirement someday or win the lottery. Not infrequently, too, since a lot of Americans realize a little bit too late that they’re already quite advanced in age and in their careers, but they somehow forgot to pay for their retirement fund.
It’s important to pay yourself first and take care of your retirement fund before you go into real estate investments. Your retirement fund shouldn’t be anchored on whether or not you’re going to make money from your real estate investments, even if you think they’re not risky because they’re in real estate notes. Your retirement fund should be shielded from most forms of risks because it’s supposed to be money you’ll be spending when you won’t be able to work anymore.
2. You’ve Paid Up For Your Life Insurance
Another financial goal that you should settle before you invest in real estate is your life insurance. As you very well know, your life insurance is your protection against any unforeseen uncertainty, risk, accident, disability, or even death. If you haven’t settled your life insurance yet, you run the risk of being financially unprotected in the event of anything unfortunate.
It’s highly important for you to set up your life insurance coverage before you venture into other investments. Everything in life involves risk, and all investments are risky in one way or another–whether you risk losing your job, lose your money in the stock market, or lose the money you invested in real estate, they’re all the same. There’s always a risk. But it’s your life insurance coverage that gives you some extent of protection from risk.
3. Your Current Real Estate Investments Are Earning Money
Another sign that you’re ready to diversify your real estate portfolio is when you see that your current real estate investments are already consistently earning money. If you’re already able to make your existing portfolio work for you and bring in some cash to your finances, this is a very clear indicator of your own capability to select and invest in assets that work for you.
This is where the debate between those who favor specialization and those in favor of diversification comes in. There are two main schools of thought in real estate investment: those who believe in diversification and those who believe in specialization. You also have to know this because if you’ve made your existing assets earn cash for you, then you’re smack right in the middle of this divergence of opinions.
Those who believe in specialization say that when you’ve started to make your real estate investments earn cash for you, then you should focus on buying the same type of property in the same location. The basic idea behind their view is that you should just repeat what you’re doing if it’s working for you. They say that this investment strategy allows you to maximize your gains by repeatedly doing what makes money for you. You also avoid spreading yourself too thinly.
Those on the other side of the argument believe that you should diversify once you’re able to make your existing real estate portfolio earn some cash for you. The basic idea behind what they’re saying is that you shouldn’t put all your eggs in one basket, or in a similar basket. They say that you should strike a balance between risk and reward by spreading out your investment in different types of property across different locations.
4. You’ve Tacked Investment Experience In Real Estate
Investment in real estate takes a lot of experience to make things work for you. In the first place, real estate investment, by its very nature, is a long-term investment. They’re not comparable to stocks or securities. Prices of shares of stocks can skyrocket in a few weeks or months. They can also fall sharply in a market downturn or stock market crash. The same can be said of securities and bonds. But you can’t say the same for real estate.
The land values and prices of real estate assets don’t fluctuate as sharply as stock market shares, securities, or bonds. You don’t wake up one day to find out that your real estate assets have doubled or tripled their values overnight. Land values go up slowly but steadily over time. What would make them go up a little bit steeply is if new developments and infrastructure are constructed adjacent or near them, such as when new roads or commercial centers are built next to or near suburban properties. Essentially, real estate investment takes time.
It’s this long-term nature of real estate investment that requires you to spend considerable time and years of experience first before you start thinking of going for the big leagues. Your current real estate picks would take time before you can say whether you were right about betting on them or not. For instance, if you bought a multiple-unit residential property so you can have it rented out, you’ll have to rake in consistent rental income to say it was a sound choice. But all of this takes time and experience.
Real estate veterans and financial planners would often suggest that you focus on specializing in your real estate picks that turned out to win. They’d tell you to keep repeating your successes until you’re comfortable and confident enough about your real estate investment decisions. But if you already have solid real estate investment experience, then you might be ready for managing a more diverse portfolio of property investments.
5. Most Of Your Real Estate Investment Is Urban
This isn’t a universal belief, but there are real estate investment analysts and financial planners who subscribe to the notion that it would make more sense to diversify if your real estate investments are located in an urban area. The basic idea behind this belief is that it would be significantly more difficult to diversify your real estate investments in a suburban area.
They say it’s quite unlikely for you to make money by investing in multiple types of property, such as condos, multi-unit properties, and single-family homes, in a suburban setting.
6. You Often Have Cash You Want To Invest
Another important sign that you should watch out for, among the others discussed here, to determine whether you’re ready to diversify your real estate investments is you often have cash that you’re looking for ways to invest. Of course, it doesn’t have to be literal cash. If you have access to a credit facility at low-interest rates–at rates that would give you net income–then maybe you’re just about ready to diversify your real estate investment portfolio.
You have to be careful, though, before you decide to put in borrowed money into real estate investments. These two things are opposite by nature. You incur costs when you borrow money because you have to pay for the interest. On the contrary, it takes some time before you can make your real estate property cough up income money for you. But if you think you have a way of making your asset earn for you immediately, such as through rent income, then this might work for you.
Is It Time?
There are no hard-and-fast rules to determine whether or not you’re definitely ready to diversify your real estate portfolio. But there are practical signs that you can discern based on your own circumstances.
You need to take care of your retirement and life insurance first. You need to make your current assets earn income and you also have to get more experience in real estate. If you want to diversify at some point, consider investing more in urban properties. If you’ve done all this, and you have the cash, then maybe it’s time.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.