Why Wise Investors Diversify

You are probably familiar with the concept of diversifying your portfolio. The basic concept is the same as Grandma always said “don’t put all your eggs in one basket”. Simply put, if you spread out your risks you are much safer if one (or more) of them goes bad for some reason.

Donald Trump was approached once by someone telling him that one of his business ventures was failing miserably! What ever what he going to do about it? What did he have to say about that!?!? Interestingly enough his reply was “So? I have 50 others that are doing great.” This is just one (glorified) example how we can balance out our risk in ways that, although each choice may be risky in itself, the balance as a whole is not.
 
It is the same with real estate. For a beginner, as with any venture, the risk seems great. So great, in fact, that the potential investor may be paralyzed into non-action. This is the downfall of almost all would-be investors. Because you will notice throughout history, those who are self-made millionaires, when they take a catastrophic hit or failure they are able to get right back up and re-build their wealth. This is because they already know that their wealth is dependant on their willingness to overcome the fear. They must actually invest in order to profit from their investments!

Once an investor gets past that initial fear, even moving into expertise in the area, it is only normal to diversify their investments. There are many options to choose from including, but not limited to: pre-construction, new construction, condo conversions, single family homes, land, commercial space and/or multi-unit spaces. Even inside one type of real estate investment, if you have a favorite, you can choose a variety of locations and demographics. Consider, when you are starting out, to limit the number of units you may get in any one development, demographic or style. Choose a maximum number of 2 or 3, then get ready to diversify. If needed, set limits for yourself. One example is: for every negative cash flowing property, choose one that is positively cash flowing an equal or greater amount.

There are no hard and fast rules, there are just different ideas and strategies some people will use to accomplish their goals. Other investors have other priorities for example no-maintenance properties: properties that have on-site management that will take care of everything for you. You can easily find these scenarios in condo buildings, etc. All you have to do every month then is collect rent and pay the mortgage (and association/management, if applicable). This one is a real time-saver if you have a regular full-time job and have no time or energy to spend on the upkeep of your investments.

Whatever location, price range, age or style of investment you choose, make sure you have assembled a team of people who are experts in their area. Robert Kiyosaki (best-selling author of the “Rich Dad” wealth-building books) has said that if you are the smartest person on your team, your team’s in trouble. The most successful people work to surround themselves with people who are experts at what they do. For real estate investing you may want a savvy realtor specializing in investing and a mortgage coach that does the same, who will look at your long-term strategy of investing, not just getting the sale. You may also want to use a CPA, trusted tax advisor and/or attorney. Choose carefully because these are the people with whom you are trusting your livelihood.

Author: Alex Anderson is a licensed RE/MAX Advantage-Plus Realtor. She specializes in helping people to build wealth and prepare for retirement through Minnesota Real Estate Investing.

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