Spread your real estate investments to reduce your risk

As the worldwide real estate market continues to recover from the devastating collapse of 2008, it seems that more new investors are now joining the party. One worrying trend is the fact that many relatively new investors are chasing the “hot markets” and putting all of their eggs in one basket which can be very dangerous. When markets are flying, asset prices are rising and money is being made, it can be very tempting to concentrate on one particular area. However, there are major pitfalls to this strategy!

If we look back to 2008, a part of history that many investors seem to be ignoring at the moment, a relatively small increase in the number of US mortgage defaulters very quickly engulfed the market and caused a collapse in worldwide real estate. This was something that nobody had forecast, something that last occurred during the great recession and there are very few people living today who went through that particular crisis.

Real estate prices will not always rise

As we touched on above, it is very easy to get carried away in the short term when markets are flying, asset prices are moving higher and large amounts of money is being made. Those who have been successful time and time again in the real estate market are those who have sold before the top and bought before the bottom of the market. Once the market tops out it can fall relatively quickly and when a market bottoms out it can rise relatively quickly. It is therefore imperative that you spread your geography, real estate type and, something which many people ignore, your investment timescale for individual investments.

Quote from PropertyForum.com : “Bank of England all talk and no action on UK property boom“

Look long-term with real estate assets

While there is nothing wrong in taking a profit when a profit is available, when looking towards the real estate market you should be investing on a medium to long-term basis. You should have a target in mind, you should have a “fair value” figure in your head and you should stick to your guns. If you believe that one of your assets is moving towards an overbought position, i.e. the value is more than you believe to be fair value, perhaps it is time to consider a disposal?

While individual country real estate markets will vary in performance, there will also be subsectors within individual countries which will show great variation. It is also likely that retail, commercial and housing stock markets will not move together at the same pace although they will likely move in line with the economy in general terms.

Risk assessment

You should continually monitor the value of your real estate assets, make changes where applicable and assess the risk/reward ratio. If this is in favour of further upside, maintain your property portfolio for the time being, but if the risk is potentially more on the downside after a property price rise, then maybe you should consider reducing your exposure?

It is also worth taking into account specific risk and systematic risk which relate to specific assets and for example local economy considerations. You may have exposure to the best asset category, your timing may be perfect with a particular market but if the economy turns, there is political unrest or some other major event then this would impact all investment markets in that country – and possibly beyond.

Conclusion

In order to give yourself a balanced approach, a balanced portfolio and a chance of success in the longer term, you should incorporate an array of different types of real estate into your portfolio, different geographical locations and different risk/reward ratios. This will ensure that you are not over dependent on one particular market, one particular type of property or one particular country. There may not be any short-term fireworks with this approach but it would give you the best opportunity to create a lucrative long-term business.