Suppose you haven’t yet invested in your first real estate syndication with us. In that case, it’s likely you’re still learning the process, building your various savings accounts so that you can feel confident as an investor, or maybe you’re unclear about which type of asset would be best as your first foray into commercial real estate.
Alternatively, suppose you have invested in Multifamily. In that case, it’s likely your concerns revolve around how to build diversification into your real estate portfolio and what types of assets should be accumulated in which order.
Well, I’ve got good news!
In this article, I’ll walk you through the steps to building a diversified, complimentary commercial real estate portfolio. So, when you’re done reading this article, you’ll know exactly what to look for next, no matter where you are in your investing journey.
Our Three Favorite Asset Classes For Diversification
The key is to select uncorrelated yet complementary asset classes. We’ve found three unique asset classes that are a step above the rest based on cash flow, renters’ needs, and operator strategy.
We started by investing in multifamily and, in time, added self-storage and short-term rentals. Each diverse asset type provides a unique solution to a different demographic, varies in monthly or yearly turnover, and requires a different business plan to best serve all involved.
When you have a single asset in your investment portfolio, your risk is concentrated on that one property. However, if you spread your investing power over three or more assets, each one carries less power to make or break your investment strategy. And, to take it a step further, when you spread your risk over multiple properties in various markets across these three asset types, you’ve created a truly diversified real estate portfolio.
Multifamily Real Estate As Part Of Your Diversified Portfolio
First and foremost, multifamily real estate syndications have been our default and reliable asset class because of their unique position in the housing market – tenants find them more affordable than single-family homes. With the increased migration patterns and shortage in housing supply in the past couple years, we are still seeing very high demand for multifamily and apartments.
Multifamily investments can be found in every city, job market, style, and demographic across the US, allowing diversification within the asset class. Apartments are generally rated as an A, B, C, or D-class property and can come with all the bells and whistles of a new build or reflect years of neglect and deferred maintenance.
Multifamily real estate properties produce cash flow monthly from rent payments, and turnover is typically on an annual basis as tenant’s leases renew.
Self-Storage Property As Part Of Your Diversified Portfolio
One great addition to your real estate portfolio could be self-storage. Self-storage properties have come a long way in recent years! Of course, you’ve seen Storage Wars, right?
Nowadays, operators and owners have leveraged technology to allow guest entry, turn on and off lights, unlock and lock facility gates, allow renters to pay fees electronically, and much more. This has reduced the need for on-site staff to the point that one employee can serve hundreds of units at a time, which also drastically reduces overhead.
Storage units can turnover monthly as renters’ needs adjust, but re-leasing a unit only requires a little dusting of the cobwebs to be ready for a new renter within the same day. While per-unit rent is much lower than a multifamily unit, self-storage properties can easily pack hundreds of units onto a small piece of real estate, making storage facilities’ lot size to revenue ratio ultra-efficient.
Storage units come in various sizes, climate-controlled, non-climate-controlled, interior access, exterior access, with or without utilities, and, of course, in different metro and suburban locations, all of which provide the opportunity for diversification within the asset class.
Short-Term Rentals As Part Of Your Diversified Portfolio
We’ve all seen how popular AirBnB and VRBO have become in the last decade. Especially with the lockdowns during the pandemic and the whole remote work culture, many people especially in smaller homes and apartments sought refuge in more remote destinations and stayed in short-term rentals that provided more space and breathing room.
Within the last 5 years, we’ve seen nearly 300% growth, and it continues to grow as it competes with the hospitality and hotel industries. These shorter-stay homes and properties provide a larger, more spacious and unique experience to make traveling to various destinations more comfortable for individuals, couples, families and larger groups.
Short-term rentals tend to see higher revenue based on a per-night charge basis, yielding higher profits and margins despite potentially higher expenses and turnover costs. Due to this, STRs provide significantly more upside on cash-on-cash than traditional long-term rentals and allow for a higher resale value based on the increased revenue.
How To Build A Diverse Portfolio With Three Asset Types
With just these three asset types – multifamily, self-storage, and short-term rentals – you can immensely diversify your portfolio. In addition, by investing in multiple properties of varying class, located inside and outside of metro areas, with differing job opportunities and population diversity, you can spread your risk relatively thin across all your syndication investments.
While this isn’t likely something you can achieve tomorrow, it’s crucial to start with the end in mind. If your goal is to have 20+ syndications providing you cash flow and appreciation from nearly every state across the US, now you have a strategic way to approach that goal.
For those just getting started, we suggest getting your feet wet with a multifamily syndication first and adding on various asset types and classes as your confidence in real estate investing grows.