For inactive Philadelphia real estate investors, they are usually exposed to several risks. In mitigating these risks, an important factor to be considered is diversification; and Philadelphia is an ideal environment for that. It has a great many different neighborhoods, income levels and tastes. Becoming an inactive real estate investor might be due to various reasons including time constraints, or inadequate knowledge and exposure. Nonetheless, one crucial reason to become a passive investor is that it presents you with a chance to diversify, even within your Philadelphia real estate portfolio.
Why is diversification necessary?
Risks are everywhere, even in the Philadelphia real estate investment market, but they become more evident when you fail to diversify. Diversifying your entire investment portfolio is not limited to investing in real estate passively, you can also decide to diversify even further in that same niche. How would you feel if all your properties are concentrated in one geographical area, and a disaster occurs in such an area? What kind of impact would such a disaster have on your investment properties? These concerns, among others, are why you should consider diversifying your real estate investments.
Methods of Diversification
As a passive investor, mitigating your risk starts with passive investment. Apart from geographic diversification (as described above), you can diversify across asset classes. For best results, it is advisable that you mix up the asset classes you will invest in for your real estate investment portfolio. Also, it is not compulsory to invest in every asset class, just settle for a viable few.
Local investment, within the Philadelphia neighborhoods an investor knows well, is common to newbie investors. However, this exposes you to risks of local economic setbacks. There is never a simultaneous movement or expansion and contraction of real estate markets. Thus, your risks can be mitigated through geographic diversification. When there is a fall in the local market of a certain area, the effects of such can be reduced by returns from investments in other geographic areas with a high market. As passive investors interested in diversification, you can start by using a connecting region approach, i.e., invest in locations closer to each other, or in various geographic areas with connected demographics, such as a higher proportion of college graduates or workers with high income.
Asset Class Diversification
Apart from geographical diversification, asset class diversification is another means of spreading your real estate holdings. As a passive investor, you can benefit from asset class diversification, as it offers a safe haven during economic downturn, while increasing your return when the economy is doing fine. Self-storage properties and retail with major anchor tenants are two options that thrive during economic dips. To further lessen the risks involved, you can engage in further diversification within your asset class.
Diversifying your holdings is easier when you are a passive investor. Furthermore, you have the chance to work with industrious and dedicated partners that will offer you excellent investment opportunities that bear great potentials. And lastly, you get to manage your time better through professional management.