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Wednesday, August 4, 2021

Diversification Through Real Estate


There is no doubt that real estate is a significant component of asset allocation, and it must be included as a key element of any investment portfolio for the purpose of diversification. But why? And how can you do this?

Why is Real Estate Good for Diversification?

Real estate investments offer some great benefits when it comes to diversification, so before we explain how to leverage real estate investments to diversify your portfolio, we will first explain their importance:

Low Correlation:What makes real estate investments a great diversification tool are their low correlations returns. Such a thing is available due to the stable returns that tend to be much more stable when compared to the prices of stocks or other financial instruments. Singing a rental agreement indicates the locking of your return for at least a year. Looking at this, your property or real estate will serve as an anchor asset providing a steady income despite the fluctuations of the market. 

Inflation Hedging: When compared to equities or bonds, real estate investments tend to be more correlated with inflation, especially when faced with accelerated inflation rates. An increase in inflation will increase the cost of construction, which means that property prices will rise as well. Property leases will be adjusted to reflect the changes in inflation rates making real estate investments a good choice for investors aiming at maintaining their purchasing power in the light of accelerated inflation rates. 

Tangible Asset:With real estate investments, you will possess a tangible value that you will be able to enhance over time, which is not the case with stocks and bonds. You will have better control over this value in a way that differs from traditional asset classes.

Steady Cashflow: A fixed amount of rent that you would receive on a specific date every month is considered a stable supply of money, granting your portfolio a level of liquidity that will help you in rebalancing and other forms of diversification.

Now that you know how real estate a very helpful financial instrument can be when it comes to diversification, it is time to understand how to use real estate investments for diversification.

How Do You Invest in Real Estate for Diversification Purposes?

In the past, you would have needed a huge amount of capital to start investing in real estate projects. You would also need to be able to examine the deal flow to choose the right project to invest in. Those two are considered out of reach for most individual investors, and even if you were able to find the right project, putting a huge amount of cash in it isn’t going to do much for diversification.  

Investing in REITs would be a better option; they are publicly traded on stock exchanges and grant indirect exposure to property portfolios. What makes this a slightly more efficient option is that you will be able to buy into an already diversified real estate portfolio managed by an expert. In this case, you will be paying the costs through an operational middleman, and you won’t have control over which properties are chosen for investment. 

The Bottom Line

Including real estate in a mixed-asset portfolio will provide you with key diversification and inflation hedging benefits. And if you choose the right asset mix and had a well-constructed portfolio, real estate will also offer you a steady cash flow even in times of market volatility.   

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