In a prior snippet we discussed key risks and mitigation strategies when investing in apartments. Risk management, however, further extends to managing risk within one’s own portfolio as well.
How can one accomplish that? By being diversified. Diversification helps spread the risk and balance overall performance returns because in a real world scenario not all investments will perform perfectly simultaneously over time.
In the beginning when one starts, and as mentioned in prior snippets, it is important to be focused to help prevent the feeling of being overwhelmed by numerous investment opportunities and being spread too thin to a point of inaction and analysis paralysis. However, over time, as one’s portfolio starts to grow, it is important to manage concentration risk and consider diversification.
In today’s quick snippet we’ll cover five key areas of diversification to consider.
1. Sponsor. In prior snippets we discussed how to find and connect with sponsors. Over time, you will likely build strong relationship with multiple ones. Asking for sponsor referrals from your trusted sponsor contacts is another way to source such relationships over time.
2. Market. Real estate is regional and each market has its unique characteristics. Diversifying across various states or even cities within the same state is one way to approach spreading the risk. For example, states like TX and FL were more severely impacted by the rising cost of insurance in 2022-2023, which inevitably impacted the bottom line for many operators. Other states like IN or inland fared better, at least from a cost basis perspective. Considering the business/landlord friendly climate can also have a meaningful impact on performance.
3. Asset Class. In a prior snippet we demystified other commercial real estate asset classes one can consider outside of multifamily, such as self-storage, industrial, commercial retail, etc.
4. Asset Subclass. Within multifamily there is a variety of asset sub-classes Depending on one’s risk appetite or investment criteria (cash flow vs. appreciation vs. tax mitigation) even within multifamily there are various opportunities to consider such as new construction, or build to rent, or opportunity zone investing, etc. in addition to the more traditional stable value add Class B apartment building.
5. Funds. Funds represent a great way to spread the risk. There are a variety of funds – ones that invest in the same asset class (multifamily for example) but in a variety of properties across markets or sub classes. Customizable funds allow one to further diversify across various asset classes within the same fund, if the key sponsor makes such options available. Lastly, one can invest in a variety of funds – e.g. self-storage fund, short term rental fund, etc. – and accumulate a fund portfolio over time.
Ultimately one’s own risk appetite, investment objectives, and investment criteria will drive such decisions. However, they key is to not lay all your eggs in one basket and instead take calculated balanced risk and consider diversification as you progress along your investment journey.
Download The Busy Professional’s Quick Guide To Investing In Multifamily here.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.