Diversification into Real Estate

There is a famous slogan in the investment world that goes a little something like this: “Don’t put all your eggs in one basket.” What this really means is diversify.

Diversification is an extremely important process for investors. In order to reduce overall risk from different markets, many investors spread their money in different types of investments. For instance, if someone has all of their money in a single airline stock, it would be a good idea to invest money into rail stocks and completely different industries, such as technology, financial services, oil, gold, etc. This prevents an investor from losing everything in case, for example, an indefinite strike by airline pilots. By having money in other markets, the investor does not run the risk of losing a large share of their total investable assets.

Historically, it was very difficult to be a direct investor in real estate and diversity. You could buy REITs, but if you wanted direct access to individual properties, you had to have a large pocket book to do it. Creating a proper asset allocation within real estate means you want to diversity across geographies, across product types in in some cases, across operating partners. An operating partner is the real estate company that manages acquisitions and deals with the day-to-day hassles of property ownership. Many investors do not want to spend hours on end researching markets, returns, laws, taxes, locations and much, much more so they rely on operating partners to do it for them. Another way to diversify within real estate is investing in both debt and equity. When you are an equity investor, you share in the cash flow from rents and appreciation when a property is sold. As a debt investor, you buy loans secured by real estate and you can anticipate a steady stream of cash flow dictated by the interest rate of the loan. However, you do not participate in appreciation from sale because you are investing in a loan, not investing in equity.