The Ultimate Diversification Tool

Published on: 13 July 2020

It’s one of the first things you learn about investing: diversification is vital. When you have a diverse portfolio, a hit to one of your assets doesn’t drag the remaining assets down. It’s why we divide our assets between stocks, CDs, and property. It’s why we short one company while going long on another.  It’s a safety net, and it’s one of the most important components of your investment strategy. When you invest in traditional single-family real estate, you throw this principle out the window.

Why? Because you put a large chunk of your cash into ONE piece of property. That piece of property must be purchased (or rented) by ONE family in order for you to turn a profit. In between, you’re subject to the local market, neighborhood comps dragging down your home’s value, and deals that could fall through.

And yet, real estate is a historical winner. With a few exceptions, real estate assets rise over time.

So, how can you invest in real estate while still maintaining a diverse portfolio?

Invest in multifamily apartments. When you invest in multifamily properties, consider that each tenant is just a percentage of your investment. If one or a few tenants move out, your investment is still strong. Your management team can cover small losses because the rest of the building’s rental income is stable. You don’t have to worry as much about factors like the local market or neighborhood comparables because multifamily investing is valued based on the income of the apartment – not comps. Do you need an extra incentive? Just ask your CPA about the tax benefits of multifamily investing – they’re numerous.

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