With Easter weekend coming up, I am reminded about the wise old investment adage of not putting all of one’s eggs into one basket. Due to high up-front investments required to acquire quality income properties, we often see investors committing too large a portion of their net worth into too few assets. If all goes well, this strategy may be OK – but since no one can predict the future with 100% certainty, smart money is invested using an asset allocation model to spread risk and minimize losses if a single investment fails to perform. With investment minimums as low as $25K, DSTs offer investors an opportunity to develop a portfolio of investments that can be highly diversified across asset classes and geographies thereby minimizing the potential negative consequences that could occur if individual properties experience problems.
We are fortunate to have our headquarters located in an area that has experienced perhaps the highest real estate appreciation in the entire US – Silicon Valley. Investors in our area have seen their real estate investments increase up to 4 times or more in value over the last 20 years. Instead of feeling elated at having all this increased net worth, many California investors are understandably growing nervous about having so much equity tied up in an area that is subject to earthquake risk and increasing congestion that is causing renters many to consider moving to other areas. Furthermore, most rental property owners are realizing very low rates of net cash flow on their appreciated equity and now want to put that idle “trapped equity” to work to generate a nice steady income.
Whenever possible, we recommend that investors divide real estate investments among multiple properties in multiple areas to minimize risk. This is especially true for older investors who have worked hard to develop a sizable estate that they plan to transfer to their heirs and who do not have the time or interest to go back to work to regain possible losses that might occur if an investment sours.
To be sure, there is some extra work in having a diversified portfolio e.g., more tax forms need to be completed and more reports will need to be reviewed and filed. However, a diversified portfolio will reduce stress and create more reliable and stable returns and result in a higher likelihood of capital preservation.
Please contact us if you would like to explore the power of diversification.