The one rule of real estate investing that is critical for all is – “Do not put all your eggs in one basket”. The reasoning: if a farmer trips while bringing the basket of eggs back from the henhouse, they could end up in a sticky situation. These words of wisdom extend far beyond farming; they perfectly precise the concept of not putting all of your money into a single investment. Diversifying the portfolio is one way for investors to reduce the risk of a shattered nest egg. But, how do we diversify? You can do so through real estate investment.
Are you spending money? Some experts believe that if you do not diversify your portfolio over numerous asset classes, including real estate, you are essentially throwing money away in the long run. You are overexposing yourself to risk with each market fall.
Diversification is undeniably vital. Warren Buffett, the legendary investor, has advice for anyone looking to get the most from a long-term investment strategy. He likes to say that diversification is “protection against ignorance.” Real estate is one of the things one should consider if you want to diversify.
What exactly is Portfolio Diversification?
Portfolio diversification is a risk management approach that entails investing in asset classes to reduce loss exposure and enhance earning possibilities. (We are trying hard not to use the old metaphor of placing all your eggs in one basket, but it is difficult to ignore).
A diverse portfolio is like a solid foundation that helps your assets withstand disruptions, just as a solid foundation helps a skyscraper stand firm in all conditions. The same set of risks will not affect different types of assets in different markets. Diversification strategies are not all created equal.
When the market crashes, there is usually a ripple effect, and markets crash globally. But, real estate is a tangible asset. It is a real, tangible asset. A stock market crash or an industry disruption may completely deplete equity, rendering some of your stock holdings worthless in perpetually.
Why Real Estate?
“Why do investors add real estate to their portfolio” is a commonly asked question. Real estate is a fundamental component of investment portfolios. Acting as a buffer against the volatility of stock market returns, rising interest rates, and inflation. Income from long-term lease contracts can be a significant component of real estate returns at a time when investors are looking for yield.
Unlike other assets, it appears that real estate and real estate diversification pay off at a time when the benefits are most needed, i.e. When consumption growth opportunities are limited. The returns on real estate are predictable. The predictability of real estate returns appears to be roughly the same as that of stock returns.
For many years, the 20% Rule has been popular. This method, devised by Yale’s Investment Office’s David Swenson, entails diversifying at least 20% of your portfolio into alternatives to the stock market – often, real estate. For example, a sample portfolio based on the 20% rule would look like this:
- 30% of the stocks are domestic.
- 20% of the budget is allocated to real estate.
- 5% for developing markets
- 15% of overseas developed markets.
- Bonds and securities comprise 30% of the total.
Also Read: 4 Top Reasons to Invest in Real Estate
How to build a real estate portfolio?
Real Estate is among the most profitable asset classes, and it’s an excellent approach for any investor, including those who emphasize stocks, to diversify their portfolio. In other words, you will invest in a variety of assets:
- Commercial Real Estate: Commercial Real Estate investing is most appealing investment choice. This is because regardless of market uncertainty. Commercial real estate investing delivers a continuous stream of cash flow and asset appreciation.
- Real Estate Crowdfunding: Investing in real estate used to be a lofty ambition for the average investor. However, this is no longer the case. Real estate crowdfunding is an innovative way for investors to pool cash for a real estate project. In most situations, the crowdfunded property is controlled by an operator. And all an investor needs to do is spend their money to support the endeavor.
- REITs: A real estate investment trust (REIT) is a firm that invests in revenue-generating real estate. A REIT will frequently invest in a large number of real estate properties. Mutual funds and real estate investment trusts (REITs) are both types of REITs. The REITs earning are likewise not subject to income taxes.They give out 90% or more of their income in dividends to their shareholders.
- Fractional Real Estate Ownership: Fractional ownership is the sharing of ownership of a premium office space with a minimum of Rs.10 lacs by unknown persons. In addition, investors can divide the revenue and expenses connected with this asset in proportion to their investment. In terms of rental revenue ad capital appreciation, fractional ownership ensures returns and expanding return rates.
Incorporating real estate in a mixed-asset portfolio provides important diversification and inflation hedging benefits, possibly improving the portfolios risk-adjusted returns. With the correct asset mix, a well-built real estate portfolio may also provide a relatively constant income stream despite market ups and downs.
Real estate is an excellent investment vehicle. A middle-class investor, on the other hand, may find it difficult to diversify and acquire many houses. They may readily diversify, though, by using real estate platforms such as Gak Group. They can engage in fractional ownership and crowdfunding as viable investment choices that allow for regional diversification.
Gak Group, a prominent Growth Tech platform in India, provides Grade-A real estate properties at cheap costs to its clients, with an annual IRR of up to 21% guaranteed.