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David Swensen’s Yale Model of investment suggests that maximum profitability in investment is best achieved when a portfolio includes allocation to alternative investments such as real estate. Modern Portfolio Theory also encourages an estimated 20% portfolio allocation into hard assets, of which the physical bricks and mortar of real estate is an excellent option.
This is all about minimizing risk and creating the best possible environment for healthy cash-flow. Adequate portfolio management through proper diversification helps investors achieve strong lower-risk returns over the long-term.
In terms of choosing real estate for investment, it is also encouraged to further diversify within the property arm of your portfolio. The innovation of Real Estate Crowdfunding has made this easier than ever before due to low initial costs, remote access, quick investment turnaround, and the removal of admin. Here are a few tips on how to build a fully diversified real estate portfolio using crowdfunded real estate:
Before doing anything, it is advisable to take a look into the market as a whole and analyse a few things about both your aims and the market you’re going into. You’ll need to think about the following: how the market is doing, what geographical areas are doing well, what type of property you want to invest in, what location(s) you want to invest in, how much you’re looking to invest, what kind of strategy you’re adopting (core, core plus, value added, opportunistic), and what kind of timeframe you’re working with (i.e. long-term vs. short-term).
It does not cost much to put money into a property using Real Estate Crowdfunding – as little as a few thousand dollars. This means that you can invest smaller amounts into multiple properties, thus spreading risk and increasing your chances of good returns.
If opting for residential property, luxury real estate might be your best bet. This is because luxury real estate tends to have a low risk profile due to its exclusive nature and desirability. Luxury real estate also tends to profit more from the development of an area than non-luxury real estate – as soon as a location becomes popular, the first properties to be in demand will be the luxury ones, and when something is in demand the price goes up.
Though investing in developing properties can be fruitful, the risk can also be higher. This is down to things like building delays, disruptions from third party companies, plans falling through, and bad understanding of the profitability of a property once it is completed. Established properties have an existing track record that you can study for yourself, which makes them lower risk options for investment.
Real Estate Crowdfunding is done entirely online, which means that you do not have to live anywhere near the properties you invest in. This allows you to profit from the popularity of places like New York or London or Paris without needing to know much about each place (the information you’ll need will be provided by the platform). It is advisable to put money into a number of different locations as this minimizes risk and helps promote healthy gains.
The smaller investment costs of Real Estate Crowdfunding means smaller equity shares in a property. This makes Real Estate Crowdfunding ideal for long-term strategies – it’s all about steady, risk adjusted returns that accumulate over a number of years, rather than quick and volatile fix-and-flip approaches that can be extremely risky. To this end, platforms such as Bricksave go for rental properties that already have existing tenants, thus guaranteeing income from day one and subsequent income for the entirety of the investment period.
Sources: https://en.wikipedia.org/wiki/David_F._Swensen
https://www.crowdstreet.com/education/article/how-build-diversified-real-estate-portfolio/
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