Ali Jamal is the Owner and CEO of Stablegold Hospitality, a real estate investment company.
Most investors already know that diversification is the key to any successful investment portfolio. I’d like to take that a step further, however, and argue that diversification need not be across multiple segments.
For example, one may want to invest in real estate, stocks, crypto, etc., to provide their portfolio with a broad bandwidth of opportunity. Take it from someone who has done this already; unless you’re an absolute genius like Warren Buffet, diversifying within one asset class will likely get the results you’re looking for much faster.
Use familiarity to your advantage.
The reason for this, primarily, is because most investors have familiarity with one or two classes versus a broader spectrum. This is definitely the case for myself as the CEO of Stablegold Hospitality (SGH), a real estate investment and property management firm. Many years ago I learned that focusing on my area of expertise increased my returns by over 100%. For SGH, this meant acquiring real estate from different asset classes or diversifying within our holdings.
I’ve found the ultimate catch, however, is a property with a mixed asset class. These are buildings that can provide multiple revenue streams, such as commercial units and residential units, all in one. A building that produces multiple streams of income can really help hedge against market volatility within that geographic territory, especially during times like these. In my experience, these buildings are also much easier to sell if you have an exit strategy, as more people are interested in buying because of the different asset classes it attracts.
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If you’ve read my previous articles, you’ll know I’m not a fan of selling real estate in general. Personally, I recommend finding a third-party property management company to manage the property instead. It may cost up to 20% of gross revenue to hire them, yet I’ve found it’s well worth it when considering the incredible amount of equity and stratification can build up in that property over the years.
Do your research.
Prior to purchasing such a property, there are a few aspects that are important to research first. One of them would be the third-party property management company mentioned above. Find one that specializes in at least one of the asset classes, whether it’s residential, commercial, vacation rentals, etc., and ensure they’re located within the same geographic area.
It’s also important to find out if there are local anchors for the asset classes of that property. For example, if the building has units that are licensed for vacation rentals or tourism, are there local events happening during the year that draw in tourism? Researching the rates on Airbnb may also give you some clues on what times of the year one can expect higher occupancy rates.
If the building has commercial units, research the migration rates of small businesses into the area in which the building is located. I find that the local chamber of commerce has always been a great resource for this type of query.
One of my own examples includes a property that my team is reviewing right now: a multi-use building in a location with a population of approximately two million people. It has six units on the top floor licensed and zoned for daily rentals, while the downstairs splits into six private office suites on one side and four retail stores on the other. From an investment perspective, this building is a gold mine. We can diversify our income within one building, which is easier for us to manage.
From a macro perspective, it also works out beautifully because different assets will be impacted, or at higher risk, at different times, depending on what’s going on locally. The risk level is mitigated by different types of real estate within the building. For example, during a pandemic such as with Covid-19, there could be a high demand for the private office suites, which will help balance the low demand for daily rentals with fewer tourists in town.
Very soon, due to the multiple streams of revenue it’s producing and comparatively lower risk it presents to a bank, this property could easily be re-evaluated. For serial investors, that translates to more money that can be used toward the company’s next investment.
And this is just one example of why I believe diversifying within a segment that one knows really well outweighs the benefits of diversifying over a broad spectrum of investments. Having a history of working with banks, other investors, brokers, etc., really helps me predict our prospects with a higher amount of confidence when it comes to real estate investing, and thus leads to more successful decision-making on our investments. I hope this guidance does the same for you in your own niches.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.