You normally hear the term “diversification” from financial planners and stock brokers. But you don’t hear the term used so often when it comes to real estate investing. The goal of diversification, regardless of the investment, is to reduce the investor’s overall risk.
Diversification in real estate is easily achieved by purchasing income-producing properties in different markets around the country. In some cases, investors even purchase property in other countries. By creating a real estate portfolio of income-producing properties across multiple and separate markets, they reduce their exposure to risk.
Because real estate markets don’t move up and down in value at the same time, or at the same rate, investors can reduce and limit their risk through diversification.
Finally, real estate investors should also realize that diversification tends to reduce both the upside and downside potential of their portfolios. That may sound a little counter-productive but, remember, the reason investors want to diversify is to protect their real estate portfolio under a range of economic conditions. They want to avoid being committed exclusively to a single market.