As the great self-improvement author Stephen Covey once said, “Strength lies in differences, not in similarities.” And the real strength of a portfolio filled with retirement investment properties lies in diversification and flexibility, rather than a sheer quantity of assets.
But what does diversification mean in regards to using real estate to prepare for retirement? And how do you ensure you find both the best retirement investments that produce a healthy return — as well as assets that provide you the security you need for your “golden years.”
Here are three ways you can inject much-needed diversification into your retirement investment properties and attain that somewhat elusive peace of mind that comes from knowing you’re prepared financially when you need it most.
The Path To Diversification With Your Retirement Investment Properties
Diversification Through Geography
Perhaps the easiest way to diversify your real estate holdings, and ensure your portfolio of retirement investments has the variety needed to withstand market changes, is to acquire properties in different geographic regions.
Too often real estate investors wanting to acquire buy-and-hold properties, for the purposes of passive income, will focus on just one or two regions of the country. Many times they’ll even specialize in a single zip code or two when developing a residential redevelopment plan.
And while it’s good to narrow your focus and concentrate on local regions that you know well — especially when first starting out as a real estate investor — it’s a good idea to step outside your comfort (and zip code) zone when building your retirement property portfolio.
If you do most of your investing in the white-hot West Coast, then look to add properties in the South. If you do most of your work in the competitive North East, then look for opportunities that give you a foothold in the Midwest.
Each geographic region has its own unique pros and cons, and by maintaining a multi-region property portfolio, you’ll ensure you don’t fall prey to sudden dramatic shifts in any one particular market.
Diversification Through Type
Another great way to diversify your retirement property portfolio is by varying which types of real estate assets you acquire.
Many would-be investors learning how to invest for retirement with real estate will focus almost exclusively on single-family dwellings — this is understandable, since these are often the easiest types of properties to rent.
But passive income from real estate holdings can come in a variety of shapes and sizes: hotels, retail, industrial, multi-family, condos, apartment complexes, etc. Having a robust portfolio with many different types of real estate will protect you from sudden losses in one particular category, as each has its own set up cyclical ups and downs.
And even within one narrow category — such as single-family dwellings — there’s variation in the type of risk factor associated to a property. (Example: high-end, mid-range, low-end.)
This doesn’t mean you should snatch up properties in every type of asset class to fulfill some kind of real estate investing checklist. It’s vitally important you understand the risks — and benefits — of each type of real estate asset. (Even for a strategy that requires as little capital as tax lien investing.)
But by doing your due diligence and sticking with core strategies for assessing risk and taking action, you’ll find you’re able to generate stable reserves of cash without being vulnerable to market fluctuations in a specific real estate sector.
Diversification Through Partnership
One often overlooked way to diversify your retirement investment properties is by looking for alternative real estate investing partnerships you can be a part of.
Now we don’t mean “partnership” in the usual real estate investing sense, in which you run around town with your partner flipping and wholesaling homes. (In retirement, your primary goal should be improving your golf game and keeping tabs on your passive income profits, not inspecting properties to see if they have mold.)
But instead, you could consider something like a Real Estate Investment Trust (REIT), which offers high liquidity and a historically-stable income stream to investors.
Modeled after mutual funds, an REIT allows you, the investor, to derive income from company-owned real estate — without much of the risk associated with typical retirement investment properties.
it’s important to note that by investing in an REIT you aren’t owning real estate. You own a share in a company that owns real estate. This can provide (often) stable dividends — returns for REITs often out-perform S&P 500 stocks — and valuable diversification to your retirement investment property portfolio.
Of course, because the risk is spread out the potential return is smaller than with a rental property that you own outright. But this doesn’t mean this effective wealth-generation strategy shouldn’t be part of your overall financial mix.
The Real Benefit to Diversification
Diversification isn’t just about lowering risk, though that’s a key part of its effectiveness as a core investing strategy. It’s about creating a more well-rounded and blended overall investment return you can depend on, no matter what the situation.
And though what your mix of retirement investment properties look like will depend on your location, expertise, and resources, the earlier you’re able to map out a plan for what your mix of passive income real estate assets will look like — the better off you’ll be.
Because when you’re able to blend residential with commercial, low-end with mid-range, East Coast with West Coast, you’ll find the tumultuous events of the real estate market more amusing than catastrophic. More instructive than debilitating. And you’ll know firsthand that most important financial lesson of all: putting all your eggs in one basket is the fastest way to lose all your eggs.