Should You Diversify Your Investment or Focus on a Specific Asset Class?
As a passive investor, you will face many questions before you make a decision to invest your money in a deal, for instance; should you invest for cash flow or appreciation? One of the most crucial questions you should ask yourself is whether it is safer to stick with one asset class, such as multifamily, senior housing, self-storage, or even cannabis real estate, or would it be better to diversify your investment across multiple asset classes?
On the one hand, focusing on a single asset class can make you an expert in the field. You will know the industry inside out and that is valuable. However, I’d strongly recommend passive investors to diversify. Why? Because you will more than likely be safer when the market corrects itself.
Different asset classes will behave differently in an economic downturn. For example, demand for certain apartments will increase. As we’ve seen with the last crash, many high-end luxury buildings suffered from high vacancy due to tenant migration to more affordable apartment buildings. At the same time, cannabis real estate is very hot right now, but cannabis consumption will decrease if more and more people lose their jobs, so spreading your money over multiple types of investments would be a smart strategy. Nobody has a crystal ball, and we don’t really know what will happen in the next recession, yet spreading your eggs in multiple baskets will serve you well.
Even though diversification is strongly recommended for you, the passive investor, it is also highly recommended to invest with a syndicator that specializes in one (or maybe two) asset classes (unless you invest with a large/institutional company that has the resources to stretch over several asset classes).
Diversifying is not enough. You must take steps to ensure that your investments are prepared for another recession. One way to do so is to focus on the cash flow the property is generating rather than on the appreciation, which can be done by investing in a property that generates positive cash flow from Day 1. Another way to ensure you are investing wisely is to study how that property and the market performed after the last crash.
Finally, though I do recommend diversification, I do not recommend in investing in single family homes. Many investors think that starting with single family homes is safer than going big and investing in multifamily homes, but the truth is that single family homes are riskier: if you think about it – once your tenant leaves, unless you have another tenant ready to enter right away, you are 100% vacant, which means that you are paying for all costs out of pocket. Since the average cash flow from a single family home is <$300 in most markets, one month of vacancy can wipe out our entire profit for the year. In addition, a single family investing is more time consuming, since you are most likely managing the property on your own.
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About the author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie", a podcast that brings the true stories behind the deals, from the most successful real estate investors around the globe. Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com