Your goal as a real estate investor is to create a strong and profitable investment portfolio. You also want to manage your risk.
To accomplish these goals, you need to make sure that your investment portfolio is diverse.
Financial experts will tell you this is true of your stocks, bonds, and mutual funds. You want to diversify asset classes so you have equities, bonds, real estate, and other holdings. When we’re talking specifically about real estate, diversification is also important. Diversifying your real estate investment properties and switching up the way you acquire them will help you grow the value of your assets and limit your risk.
More importantly, with a diverse portfolio, you’re inviting a larger number of opportunities across the Seattle real estate market.
The current market is going to offer you many opportunities, no matter where you are. Investors may choose to acquire different types of properties at varying levels of risk. You might start thinking about new markets, such as Seattle if you’ve never invested here before. Even as a new investor, it’s possible to scale growth and increase returns.
Here’s why a diversified real estate portfolio in Seattle not only makes sense – but is absolutely necessary.
Benefits of Owning Single-Family and Multi-Family Investment Property
Single-family homes are almost always the investments that rental property owners gravitate towards, and in Seattle, you can understand why. Well-maintained properties in great neighborhoods are in high demand, and tenants are usually willing to pay more for a home with plenty of square footage, outdoor space, and a garage.
Single-family rental homes are doing very well in this market, and you can count on their value appreciating quickly over time. The benefits to you of investing in a single-family home include:
- You’ll earn higher rents.
- You’ll have a more stable tenant pool.
- You can count on higher tenant retention rates.
- Property values will likely increase every year.
As a single-family investor, you can diversify your portfolio by acquiring small multi-family buildings, or even a unit within a well-managed and highly desirable building.
There are many ways that this can help you earn more with your rental investments. Multi-family rental homes will provide more income for you and less risk. Instead of collecting one rental payment every month, you’ll collect two or three or four. There’s more protection against rental vacancy because 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. Don’t let your portfolio contain only one type of property. Look for opportunities to own single-family homes, condos, multi-family units, duplexes, and even apartment buildings.
Seattle’s market offers much opportunity for diversification.
Choose a New Market for Your Next Rental Property
Another great way to diversify your real estate portfolio is by identifying new markets that you’d like to invest in.
New investors typically stay within their own geographical area, where they’re comfortable and they know the neighborhoods. If you’re ready to start diversifying your markets, think about new communities that are attractive to investors. Where are tenants wanting to live? It may not be downtown Seattle. Maybe you’ll need to move out further into the suburbs.
In Seattle, owners are finding high rents and stable tenant pools. Think about checking out this market if you’re from outside of the area. If you’ve been investing in California or other cities, consider the strength of Seattle’s local economy, geography, and tenant pool. It’s an ideal place to own property, and you’ll find you can make some great money with a rental property here.
Diversifying geographically also protects you from risk. If something occurs in the market where you have most of your properties, you’ll have other markets to support you during the difficult times.
Diversify Your Investment Financing and Risk Tolerance
Have you thought about the way you finance your investment properties? Because this is another great way to diversify your real estate portfolio; you can experiment with your financing options.
Some investors pay in cash when they can, especially now when the market is so competitive. But, that’s not always the best way to do it, even with mortgage rates rising. Seattle is an expensive market, and accessing that kind of cash can take some creative accounting. You also want to leverage other people’s money whenever you can to make your investments profitable.
Many investors still prefer to take a traditional mortgage, but that’s not the only option when it comes to financing your investment property.
You could consider owner financing. With traditional mortgage rates rising, you may find that you get a better deal with private lenders. 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 increase quickly.
Think creatively when it comes to how you finance your next property. Remember that you also have the option to leverage the assets you already have when you want to increase your portfolio and acquire a new investment property.
Consider a 1031 Exchange
One of the easiest and most popular ways to diversify a real estate portfolio is with a 1031 exchange.
The 1031 exchange serves an effective and growth oriented long-term investment strategy.
Selling an income-producing property requires you to pay taxes on the money that you earn from the sale. With the market priced where it is right now, you’re likely to earn a lot of money when you sell a property. That’s a good thing, but it also means there are a lot of taxes to pay.
Unless you buy a new investment property.
With the 1031 exchange, you can sell one property that no longer serves your portfolio and buy another one. As long as it’s an income-producing property, you can defer the payment of those taxes.
This is especially beneficial to investors who would face a large tax bill by selling a property. It also allows you to diversify your portfolio.
If you’d like to talk about how to diversify your investment portfolio, we’d love to be a resource for you. Please contact us at SJA Property Management.