When I was just a novice real estate investor many years ago, when the earth was young, I was presented with an opportunity that I felt would be too good to pass up. A developer had recently gone bankrupt while at the very tail end of construction of a twelve condominium townhouse project a few miles south from where I lived. The bank that now owned the units was willing to offer the financing on the project. All that was required was the down payment of thirty percent, and a small amount of finish work was necessary to complete the townhome construction at that point in time.
Running the numbers, it seemed like a tremendous deal. The cash flow projections were definitely there for rentals. The neighborhood was excellent, had a great walk score, and was close to the commuter train to New York City. The only problem: it would have drained everything I had in the bank to make it happen, stretching me to the point of danger cash-wise. And, most importantly, it meant placing all my eggs in one basket.
Analyzing for diversification
I ended up passing on the project. I went with my gut. I was young and relatively new to the game, and I did not have enough confidence in myself to follow through on such a risky endeavor, even if the upside was potentially huge. In the end, I evaluated the need for diversification in my portfolio as a strong way to remain even keel financially. And it has kept me in good stead ever since. I thought, “let someone with deeper pockets than myself inherit the risks of this project…” And so I did. And never thought twice about my decision.
I should also point out that, as a very young adult, I invested some funds in a mutual market bond fund. After a year of holding the asset, I discovered that, as a hands-off investment, I had made a poor choice – at least in the short-term. I had lost money in the short run, and decided to get out of bond funds soon thereafter. I vowed not to get into financial instruments I did not fully understand. Silly me. I could have simply waited a few more years and seen the bond fund rebound. But I was too short-sighted back then.
Utilizing different classes of real estate
So let this be a lesson to the novice real estate investor. Diversification is always a good idea. And I don’t simply mean by buying one property on one side of town, and another on the opposite side. Rather, consider different classes of real estate. You can own properties you actively manage, and at the same time, also invest in Real Estate Investment Trusts (REITs), where professionals manage a pool of funds, but allocate the funds strictly to real estate. This will absolutely help in your diversification.
Keep in mind that diversification into different types of real estate is also a good business model. Don’t place all your eggs in the residential real estate basket, for example. Consider having some holdings in commercial real estate too. If you already have a major portion of your property investments tied up in residential real estate, it’s always a good idea to consider some form of property diversification. Like any asset class, diversifying can be a great way to help weather any downturns in a given sector of the market. With so many large fund investors (who acquired foreclosures by the thousands in the past few years) having sold off a large portion of them on the market while prices have risen in the past several years, looking at the commercial sector to invest in now makes good sense, since prices have started to stabilize in the residential arena due to the sell-off.
The REIT stuff…globally
In addition, utilize REIT’s that spread their holdings around. There are some REITs that specialize strictly in retail space. And they may specialize primarily in malls here in the U.S., for example. But there are also other REITs that have niche holdings in foreign countries. These global real estate services tend to invest in global commercial real estate. When thinking about diversification, it’s a good idea to do your global real estate investment through the pros – namely, global real estate companies, such as Apollo Global real estate, for example.
This huge REIT specializes in equity investing. Consider how they tout themselves from their own web site: “Apollo’s real estate group has a local presence in North America, Europe and Asia and actively pursues investment opportunities in each of these geographies. With respect to our equity investments, Apollo takes a value-oriented approach and will invest in assets located in primary and secondary markets. The firm begins with an in-depth market analysis to identify asset classes, geographies and parts of the capital structure we believe will outperform in the current economic environment. We then pursue opportunistic investments in various real estate asset classes, which historically have included hospitality, office, industrial, retail, healthcare, residential and non-performing loans.”
Clearly, this company is one to be seriously considered when thinking of foreign real estate diversification and global real estate services. Keep in mind that these global real estate companies trade in specialized types of REITs, known as global real estate ETFs, or exchange traded funds. These differ from REITs that are strictly domestic in nature.
By investing in REITs, you can diversify your portfolio, keeping a hand in real estate investment opportunities – but letting someone else do all the management. Investment in REITs is just like purchasing shares of stocks in companies – except these companies are funds that invest in some form of property type. Some REITs are publicly traded, some are privately held. Either way, most REITs tend to specialize in some niche area of real estate investment.
Different allocations of assets
The largest REITs tend to be the most diversified – and their investments tend to be allocated amongst both residential as well as commercial properties. In addition, many larger REITs will invest in foreign properties as well. As mentioned above, some REITs only invest in foreign buildings. And a newer trend is for larger publicly-traded REITs to invest some amount as a stake in the creation of other, foreign-based REITs, many of which are privately held.
Many top REITs in the U.S. have enlarged their scope of properties to include overseas divisions. REITs such as Prologis and AMB Property, Simon Property Group and Kimco Realty are good places to start your search. Compared to REITs that invest solely in U.S. property, most overseas REITs tend to have higher cost structures, and may have relatively higher share buy-ins compared to strictly stateside-invested REITs. However, compare their 1, 3, 5 and 10 year yields to get a better idea of how they are outperforming the U.S. market.
What works best for you?
Investing in REITs that specialize in overseas property investment can be a very lucrative way of going. Be sure to do your homework, and then choose the correct REIT that meshes well for you. You’ll find expanding your real estate portfolio to include some form of overseas investment property is the smart way to go for long term growth. And as I mentioned above, heed my example of weighing placing all your eggs in one basket. Diversification is critical when trying to stay afloat for the long run in real estate investing.
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