How To Balance Your Real Estate Portfolio

We have all heard it said several times that we should not put all our eggs in one basket, yet we do so many times without knowing. Real estate investment is one of those areas where we need to apply this particular rule. The reason for this may not seem so obvious since many of us have heard that real estate investment is very safe and usually on the upward swing. The effect of these beliefs on our strategy is to numb our investment sense to the need to balance our portfolio. This is a precautionary advice that we need to look into a little deeper.

Balance means that you should avoid a real estate investment strategy that is tilted too far north or too far right. What this means is that there are several dimensions in real estate investment and experienced investors have specific reasons for each investment that they make. Most experienced investors also keep a flexible and open mind set when reviewing their real estate investment portfolio because circumstances change and factors that we did not envisage may suddenly come into play.

Most first-time or less experienced investors come into the field with the aim of buying to hold. The foundational belief at the back of this strategy is that the investor wants to invest in assets that are appreciating and hold them for as long as possible, some even say forever. While this may make an investor alert to properties that have this feature, he or she may close his or her mind to properties that are less attractive but are good at generating cashflow. In this instance, this strategy can make you asset-rich and possibly cash-poor under certain unforeseen circumstances.

Some other set of investors become sentimental, rather than rational when it comes to investment decisions and strategy. These categories of investors fall in love with particular areas for several reasons best known to them. If you do an analysis of their investments you will discover that they are all within a particular geographical area. This could appear to be a sensible thing, especially if they have made so much money investing in that particular area. Unfortunately, as someone once stated, the enemy of the best is the good. When you become addicted to a particular area, so many better places will fall into your blind spot region. You will see them but may not recognise their potential until it is too late.

While it is good to specialise, we must not forget to also learn to stretch ourselves once in a while. We must learn to carry out regular risk assessment of our investment portfolio in order to confirm whether or not the underlying rationales behind those investments are still sustainable. Unless you are open to self-questioning and rational analysis, you will likely be blinded to some risks until it is too late. Although such will form part of your learning experience, you can as well learn from others and avoid the painful learning path that is avoidable.

Several years ago, I learnt of an investor who had about 10 buildings in a particular area, with good rental. He had not perfected the title to any of the property, but was considered rich by many who knew him and the properties he had in that area. Unfortunately, the government acquired that particular area and demolished all the properties there.

The government claimed that the properties were built on land under government acquisition and compensation would only be paid to property owners who had been issued Certificates of Occupancy in error. He was not covered by this and the sheer shock of his sudden loss was what led to his demise. This was very painful when you consider the magnitude of his investment and loss.

Another less catastrophic mistake was of an investor who had a flourishing business in one of the southern states of Nigeria that is very close to Lagos. He had hundreds of lands and houses in this particular state. He was a committed real estate investor. If you had a transaction to do with him and you visited the land bureau of that state, the staff will always talk about the size of his real estate holdings.

He had less than five properties in Lagos and none anywhere else. Some few years back after his death and his estate was casually valued, the value of his several properties in that state was less than the value of one of his properties that was in a very strategic part of Lagos. Considering the fact that he had the money to buy several properties in Lagos, you will understand the pain of such a missed opportunity.

The moral of all the examples above is the need to diversify and balance your real estate holding. Avoid concentrating all your investments in one line of investment or one particular area. Mix your investment with appreciating assets and cash flow generating assets. Carry out a risk assessment on your investment and secure them.


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