Diversifying Real Estate Investments
Don’t put all your real estate capital in your home. Diversifying in real estate is just as important as in any other financial asset.
Investment diversification is a critical strategy, and real estate is no exception. While many investors understand the importance of spreading their investments across different asset classes (stocks, bonds, options) and within asset classes (holding multiple stocks), a common mistake among homeowners is to concentrate all their real estate capital in their primary residence. Relying solely on your home not only exposes you to local market fluctuations but also ties up most of your wealth in a single, illiquid asset. This approach can leave you vulnerable if the market underperforms or unexpected events occur, such as an immediate need to move during a market downturn.
Real estate markets are influenced by numerous local factors—economic conditions, demographic shifts, regulatory environments, and unforeseen natural disasters. As such, different cities and countries experience unique growth trajectories and risks. For example, established U.S. markets like New York and San Francisco may show modest, steady growth driven by high demand and limited supply. In contrast, emerging markets such as Phoenix or Atlanta offer rapid appreciation thanks to population growth and economic development. Similarly, international markets present opportunities that differ from domestic trends. Panama City, for instance, attracts investors with its favorable tax laws and strategic location, while Spain’s cities like Madrid and Barcelona have shown resilient, long-term gains after recovering from past economic downturns. By investing in a mix of these markets, investors can benefit from multiple growth trends and reduce the impact of a downturn in any one region.
The Pitfall of Over-Concentration in Your Primary Residence
Many people make the mistake of assuming that their home is their best investment. While homeownership provides stability and a sense of security, it also means that the bulk of your capital is locked into a single asset. If the local market takes a downturn due to economic shifts, natural disasters, or unexpected events, you risk significant losses. Moreover, unlike other investments, your primary residence rarely generates ongoing income that can be reinvested elsewhere. By having all your eggs in one basket, you are not only exposed to the risk of losing value in a single market, but you also miss out on the benefits of liquidity and passive income available through other real estate investments. Diversifying into rental properties, REITs (real estate investment trusts), or even international real estate can offer steady cash flow and allow you to access capital gains from multiple sources.
Additionally, when buying a home, many people make the mistake of “going too big”: When they apply for a home loan, they try to understand what is the maximum amount that the bank will lend them, and then try to find a property that maxes out that amount. This leads to situations where people are “house poor”, meaning, they live in a great house but don’t have enough free cash to enjoy the lifestyle they would want, because a higher-than-recommended percentage of their income goes towards mortgage, property tax and property insurance payments.
Finally, consider that you only “make money” (realize profit) on your primary residence when you sell it: This tends to happen rarely during your working years, and more likely when you are close to retirement. This can be a good thing, because you move into a smaller property and the realized profits will help sustain your retirement income. However, in many cases, many couples reaching retirement age don’t want to move away from the neighborhood, friends and lifestyle they have created around their home, and therefore never realize profits on their home. As an example, some friends in Florida bought their dream home in 2018. Only 4 years later, they got an unsolicited offer that was 60% higher than what they had paid for the house! While very attractive financially, they didn’t sell, simply because this was the home where they wanted to live, and moving somewhere else would still mean having to pay a significant premium vs. where the market was in 2018, plus all the commissions and fees involved in selling and buying a house.
How to Build a Diversified Real Estate Portfolio
To mitigate risk, investors should look beyond their personal residence and consider spreading their real estate investments across multiple asset types and geographies:
• Invest in Different U.S. Cities: Allocate funds among diverse urban centers. For example, pairing investments in established markets like New York with those in rapidly growing areas like Atlanta can balance stability with high-growth potential.
• Consider International Markets: Explore opportunities in countries with favorable conditions. Panama and Spain offer different risk-return profiles, providing exposure to international economic cycles that might not correlate with domestic markets.
• Use Different Investment Vehicles: Diversification isn’t limited to owning property outright. Consider investments in REITs, real estate funds, or even passive real estate platforms that offer liquidity and professional management.
• Reserve Funds Outside Your Home: Avoid tying up all your capital in your primary residence. Ensure that you maintain liquidity and build a portfolio that includes income-generating properties or financial assets like stocks and bonds.
In the dynamic world of real estate, diversification is not just a strategy—it is a necessity. Relying solely on your primary residence can be risky, as it exposes you to the full brunt of local market downturns and leaves you without additional sources of income. By spreading your investments across various U.S. cities, international markets, and different investment vehicles, you can hedge against risk, smooth out returns, and create a more resilient overall portfolio. Remember, a well-diversified portfolio protects you from having all your eggs in one basket and positions you for long-term financial stability and growth.
Javier Neves and Simon Benarroch
Ockham Finance Founders
