Diversifying Your Real Estate Portfolio: Exploring Alternative Investment Strategies
Updated On October 10, 2023 | by Victoria Steur
When it comes to building a solid and profitable real estate portfolio, diversification is the key to success. While traditional investing like buying and renting out residential properties or commercial spaces has proven to be lucrative, exploring alternative investing strategies can provide you with additional opportunities to maximize your returns.
In recent days, speculation strategies have gained consideration among investors who are looking to diversify their portfolios. Consequently, it increases their returns and reduces the risk.
This article will look into various real estate funding options, with a special focus on Delaware Statutory Trust (DST), as a means to diversify your portfolio.
The Importance of Diversification
Diversifying your portfolio means spreading your finances across different types of assets, reducing the risk associated with having all your eggs in one basket.
In the world of real estate, market conditions can vary significantly, and some sectors may perform better than others at different times.
By diversifying, you can mitigate the impact of a downturn in a particular market while benefiting from the upswing in others.
Exploring Traditional Real Estate Investments
To build a lucrative portfolio, it is equally important to explore both traditional and commercial real estate investments. Look below to get a clear picture of it:
Residential Real Estate
Residential real estate comprises housing for individuals and families such as homes, condos, cooperatives, duplexes, townhouses, and multifamily residences.
Real Estate Investing in residential properties, such as single-family homes, condominiums, or apartment buildings, has long been a popular choice for investors. Rental income, property appreciation, and tax benefits are some of the advantages associated with residential real estate.
|Did You Know?: 50% of millennial investors choose to invest in real estate.|
Commercial Real Estate
Commercial real estate involves properties used for business purposes, such as office buildings, retail spaces, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and industrial warehouses.
Leasing to businesses can provide stable rental income, and properties in prime locations can appreciate significantly.
Exploring Alternative Investment Strategies
Investment strategies are auxiliary strategies in stocks, bonds, and cash. Employing them can be fruitful. A few of them are noted below:
Real Estate Investment Trusts (REITs)
Companies known as REITs own, manage, or finance income-producing across a variety of industries. Without directly owning any real estate, investing in REITs offers a means to have exposure to the real estate industry. They offer liquidity, dividend financial gain, and the potential for capital appreciation.
Real Estate Crowdfunding
Platforms for crowdfunding let investors pool their money with others to invest in certain homes or projects. It is one of the ways for retail investors to access assets traditionally reserved for the wealthy.
This strategy offers diversification by enabling you to invest in a range of assets that too with relatively low capital requirements. However, real estate funding provides competitive returns.
If you’re looking for a unique way to diversify your portfolio, consider vacation rentals. These can include properties in tourist destinations that you can rent out on platforms like Airbnb or Vrbo. Vacation rentals can generate substantial rental income during peak seasons.
|Did You Know?: There are over 3 million active real estate licensees in the United States revealed by The Association of Real Estate License Law Officials (ARELLO).|
Delaware Statutory Trusts (DSTs)
The Delaware Statutory Trust is a lesser-known but powerful tool for investors. It is a legally recognized trust in which they can purchase ownership interest.
They are a type of tax-advantaged investment that allows you to co-own institutional-grade properties with other capitalists. They are particularly appealing because they provide potential monthly income and diversification without the responsibilities of property management.
How DSTs Work
In a DST, a sponsor purchases a property and sets up the trust. Capitalists can then purchase beneficial interests in the trust, becoming co-owners of the property. Here are some key benefits of it:
- Cash Flow: It often provides investors with a predictable monthly income stream, making them an attractive option for those seeking regular cash flow.
- Diversification: By investing in it, you can spread your finances across various types of commercial real estate, such as flat complexes, office buildings, or retail centers.
- Passive Investment: They are managed by professional property managers, so capitalists don’t have to worry about day-to-day property management tasks.
- Tax Advantages: Investing in DSTs can offer potential tax benefits, such as depreciation deductions and the ability to defer capital gains taxes through 1031 exchanges.
Diversifying your real estate portfolio is a smart strategy to reduce risk and potentially enhance your returns. While traditional investing can be profitable, exploring alternative options like DSTs, REITs, crowdfunding, and holiday rentals can open up new avenues for growth and income.
Remember that no single strategy is suitable for everyone, so carefully evaluate your goals and consult with experts to make informed decisions. By adopting a diversified approach to investing, you can better navigate the ever-changing market and work towards achieving your financial objectives.
Ultimately, the key to a flourishing portfolio is a thorough investigation. It is stated because a clear apprehension of financial goals, and discussion with experts can provide direction tailored to your specific circumstances and navigate people throughout. So, start embracing diversification and enjoy long-term success.