Property Management Blog

Property Management Strategies to Protect Your Real Estate Investment: Portfolio Diversification

Property Management Strategies to Protect Your Real Estate Investment: Portfolio Diversification

Diversifying your investment portfolio will protect your wealth and earn more on the real estate you own. There’s always this tip from investors, regardless of whether we’re talking about stocks or property or mutual funds: diversify. Don’t keep everything in one place. It will mean a total loss if something happens to that one particular investment.  

For some rental property owners, diversification means buying different types of properties. If you primarily invest in single-family homes, maybe you’ll add some multifamily properties to your portfolio. Or, you’ll introduce some commercial properties as well as residential rental homes into your portfolio. 

For other investors, diversifying means looking for new ways to finance acquisitions or exploring new markets where they can get more for their money. Some investors will diversify with regularity, by conducting 1031 exchanges every time the opportunity arises. 

When you want to limit you risk and increase the size and strength of your portfolio, a good San Jose property management partner will encourage you to diversify what you own. 

We are here to talk to you about the strategies a San Jose property manager can provide that will move you towards a more diverse portfolio. 

Diversifying your Portfolio with Different Types of Real Estate

San Jose has a lot of different property types, which gives investors an easy way to diversify their existing portfolios. Your property manager can help you identify various property classes and prepare you for what you’ll need to expect if you have not invested in a particular type of property before.

Imagine yourself working with: 

  • Residential single-family homes, including condos and townhomes.

  • Residential multifamily properties, whether that means buildings or a handful of units within a building. Multifamily properties can also be duplexes. 

  • Vacation rentals and short-term furnished rental homes.

  • Commercial properties such as offices, retail space, industrial space, and restaurants.

These different property types can create a lot of separate income streams and spread out the risk you take on when you focus on one asset class specifically. With rents rising over the last couple of years, single-family homes have been less attractive to a lot of tenants than more affordable multifamily properties. If you invested only in commercial office space, you might find yourself struggling now due to the remote working trend taking hold. 

Some investors will diversify by doing some fix-and-flips, although that requires a specific market and the right opportunity. You can create further diversification by investing in real estate investment trusts (REITs) if that seems like a possible route for you and your investment portfolio. 

This type of diversification will really maximize your potential for both cash flow and ROI because each of those property classes has stronger returns during different parts of the market cycle. Diversifying allows you to take advantage of rental income and returns from various parts of the San Jose real estate market. 

Working with experienced San Jose property managers, you will have a better chance of avoiding mistakes. You’ll make smart decisions. Property managers can provide some great advice on where the market is performing well, and how you can best position yourself to maximize your investments.

A Tool for Investment Diversification: The 1031 Exchange

Most property management experts will tell you that a great way to diversify your portfolio is with a 1031 exchange. Not only do you have the opportunity to buy something new - you can do it without a lot of cash because you’re using the proceeds from the sale of an existing investment property. You even get to defer taxes. 

The 1031 exchange serves most investment strategies in one way or another, and if you’re trying to diversify, this is going to open up new options for you. When you sell an income-producing property, you need to pay taxes on the money that you earn from the sale. With the increase in home values and sales prices, you’re likely to walk away with a healthy profit when you sell your investment property. That means some pretty high tax bills. But, if you buy a new investment property – or several properties – that are similar (but not the same) to the one you’re selling, you can defer the payment of those taxes. 

The term similar means you have to exchange one investment for another investment. You can’t sell a rental home and buy yourself a vacation condo. You can exchange a single-family home for a duplex. You can sell a condo and buy a single-family home. This exchange allows you to diversify without necessarily spending a lot of money.

This is especially beneficial to investors who want to let go of a rental property that’s no longer serving their investment goals. 

Here’s an example of how you can diversify with a 1031 exchange: Maybe your units in a small building of six properties are in need of a lot of maintenance, and you don’t want to invest in the work. Sell that building and buy two single-family homes. Not only are you unloading a property that’s not working great for you, you’re also diversifying your portfolio.

Your property manager can help you understand the timing requirements and other restrictions that come into play with this sort of deal.

How San Jose Property Management is a Starting Point for Diversification

Surrounded Yourself with ExpertsMaking changes to the way you’ve always done things can be a bit unsettling. 

Luckily, you don’t have to do everything yourself. Smart investors don’t hesitate to surround themselves with experts. You should do the same. 

Avoid the potential mistakes of trying new things by working with an outstanding local property management company. A good relationship with the right property managers will immediately connect you with a network of vendors, brokers, mortgage professionals, and other experts. You can use those tools and resources to have a more successful and comfortable investment experience, even while you’re diversifying.

Being innovative and creative will help you be a better real estate investor. You’ll have a stronger portfolio. Whether you’re new to real estate investing or you’ve been slowly growing your portfolio for decades, don’t get stuck, and don’t put yourself at risk. Doing the same things and buying the same properties will only lead to stagnation. Remember the value in diversifying your real estate assets, and let your San Jose property management resource help you.

We’d love to talk about your unique investment goals and portfolio. Please contact us at Cornerstone Property Management.