As every economic hiccup reminds us, strong investment portfolios need to be diverse. This is true of your stocks, bonds, and mutual funds, and it’s also true of your real estate portfolio. By diversifying your real estate portfolio, you limit your risk and invite a larger number of opportunities.
Real estate offers a number of ways to diversify. There are different types of properties to buy at many different risk levels. Even new investors can scale their growth and increase their cash flow and return on investment (ROI).
We have some tips for Canadian investors who are looking for ways to diversify their real estate assets and mitigate market risks.
What is Diversification?
Diversification is a risk management strategy in investment portfolios involving the allocation of assets across different classes, such as stocks, bonds, and real estate, to reduce overall risk exposure. By spreading investments, the goal is to mitigate the impact of poor performance in any single asset class, enhancing the potential for stable returns.
In the context of real estate investments, diversification entails spreading investments across various property types, locations, and investment strategies. This strategic approach aims to mitigate specific risks associated with individual properties and real estate market fluctuations. For instance, diversifying between residential and commercial properties, exploring different geographical regions, and adopting various financing options contribute to a well-rounded real estate portfolio. This not only helps shield against adverse market conditions but also enhances the potential for sustained, diversified returns.
Invest in Different Property Types
Single-Family vs Multi-Family Properties
Single-family homes are the most popular asset classes that investors gravitate towards. In areas like Kelowna, BC that makes a lot of sense. Okanagan properties are in high demand, and tenants are usually willing to pay more for a home with lots of space, a garage, and a yard. Well-maintained single-family homes will do very well in this market, and you can count on its value appreciating quickly over time.
If you’re already invested into single-family homes, one way to diversify your portfolio is by purchasing multi-family homes. There are many ways that this can help you earn more with your rental investments. They’re going to provide more income for you and less risk. Instead of collecting one rental payment every month, you’ll collect two or three or four. This protects you against vacancy risks. If one unit is vacant, you still have income from the other units.
Lower risk and higher cash flow are excellent reasons to diversify the type of investments you buy. Talk to any property management company and you’ll find that owning more than one type of rental home is a good way to earn more at a lower risk.
Consider Investing in Commercial Properties
An entire portfolio of residential properties can do very well, but if you add some commercial properties to your investment strategy, you’ll really maximize your potential for diversity.
Commercial real estate might make you uncomfortable, but it’s actually a very stable investment option. A lot of commercial properties include lease terms that are longer and more favorable to property owners. If you buy the right property, you’ll have lower vacancy rates, higher rents, and less maintenance than with residential units. Commercial properties can be anything from retail space to office buildings to industrial or warehouse spaces. You’ll need to be willing to learn a different set of legal obligations and best practices, but commercial properties can really help you boost your portfolio’s performance.
Geographic Diversification:
- Invest in properties located in different regions or cities to spread risk and minimize the impact of local market fluctuations.
Alternative Vehicles for Real Estate Investing in Canada
Achieving diversification in your real estate investment portfolio in Canada doesn’t always require direct property acquisitions. Consider alternative vehicles like Real Estate Investment Trusts (REITs), Real Estate Exchange-Traded Funds (ETFs), and mutual funds. These investment options offer a pathway to passive income, allowing you to cultivate a diversified portfolio without the complexities of managing individual properties.
Cash Offer Canada
If you’re looking for an easy way to mix things up and make money in real estate without the hassle of managing rental properties, check out Cash Offer Canada LP. This limited partnership fund, tailored for accredited investors, pools investor funds to invest jointly in Okanagan real estate. Cash Offer then makes those homes available as rental properties or rent to own opportunities for the growing demographic of tenants who cannot get a mortgage due to rising interest rates.
Cash Offer Canada presents an opportunity for investors to benefit from the expertise of the General Partner, AJ Hazzi, who identifies properties, manages risk, and aims to deliver consistent returns for years to come. With a focus on single and multifamily property investment, Cash Offer Canada provides an alternative route to diversification in different asset classes.
In response to escalating housing costs, our primary focus in 2024 is investing into land assemblies in promising areas, particularly the revitalization zones in Kelowna, BC. This approach involves acquiring multiple adjacent properties, rezoning them, and developing multi-family townhome and condo buildings. Not only does this strategy address Kelowna’s housing shortage, but it also boosts property cash flow and yields institutional-quality assets, contributing to long-term prosperity for our investors.
Diversify Your Investment Financing and Risk Tolerance
Another great way to diversify your real estate portfolio is by experimenting with your financing options. Many investors pay in cash when they can, and some investors still prefer to take a traditional mortgage. You might find you can get a better deal if you try owner financing. You usually won’t need a large down payment, and if you structure the deal so that you’re primarily or completely paying the principal, you’ll find your cash flow and your ROI can improve quickly. You can also use a platform like the 1031 exchange to diversify. This is a great idea for deferring taxes and acquiring new properties.
Think about your risk level as well. You can consider investing in Kelowna even if you’re out of state or out of town. There are many ways to diversify what you own, and we’d be happy to help you figure out the right diversification strategy to optimize your portfolio performance, taking into account your unique risk tolerance. Contact our Kelowna property management team at Vantage West Property Management.