Managing Risk: Diversifying Your Investment Loan Portfolio

Real estate investors often hear the same advice time and again: Diversify your portfolio. 

But, what does this mean for your investment loans and overall strategy? And, what are your options for diversifying?

What's in this article?

What does it mean to diversify your investment loan portfolio?
What are the benefits of diversifying your investment loan portfolio?
Strategies to diversify your portfolio
Start diversifying today with Compass Mortgage

Let’s explore what diversifying your investment loan portfolio could look like and how it can help you reduce risk.

What does it mean to diversify your investment loan portfolio?

Diversification is an investment strategy used to minimize potential losses by spreading your investments across different types of assets.

In the context of real estate investment loan portfolios, diversification involves acquiring and managing a variety of investment properties. 

Instead of concentrating investments in a single property or loan, investors who want to diversify would create a portfolio that contains a mix of property types, locations and loan structures.

Essentially, diversification demonstrates the idea of not putting all of your eggs in one basket.

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What are the benefits of diversifying your investment loan portfolio?

Diversifying your investment loan portfolio has numerous benefits, from reducing risk to providing greater flexibility.

Risk reduction

The most important role of diversification is to reduce the risk of losing your investments and profit.

When you concentrate all of your efforts on a single property or market, you risk taking the full impact of a loss of income or decrease in property value.

Diversifying your investments allows you to balance your risk and make more strategic decisions.

Consistent, stable income

Imagine you have one rental property that has been empty for several months, but four other full rental properties scattered across the U.S.

The success of your other properties can help to offset the losses you may be experiencing with the first property.

Safety cushion against market volatility

Different investment markets will experience different trends. 

Choosing various property types and locations will protect investors from the threat of one market’s volatility.

Flexibility with exit strategies

Flexibility with your exit strategies involves the freedom to strategically sell, refinance or hold onto properties based on your investment goals, market trends and profit potential rather than urgent need.

Investors with diversified portfolios can adapt to changing economic circumstances and more effectively manage risk because they have a wider safety net.

Strategies to diversify your portfolio

There are numerous ways to diversify your portfolio as a real estate investor, and many find the process of learning about and exploring new types of investments to be exciting and rewarding.

If you’re among this group of investors, let’s discuss some of the many methods of diversifying your investment loan portfolio.

Property types

Different property types come with their own market cycles and income potential.

Residential properties such as single-family homes, condos and townhouses can provide steady rental income.

Multi-family properties—including duplexes, triplexes and fourplexes—can bring in an even higher cash flow; and if the investor chooses to live on the property as their primary residence, they could use an FHA or VA loan for greater flexibility.

Investors also may choose to buy into specialty properties such as vacation rentals, student housing or commercial properties to further expand their portfolios.

Location, location, location

Geographic diversification involves spreading your investments across different cities, regions or even countries.

This strategy aims to minimize the impact of local market downturns or economic challenges.

In mid-2023, for example, there was a shift where more investors began to leave the Sun Belt for the Midwest due to an oversupply of apartments.

The most important location factors for real estate investors include:

  • Economic growth and development of the region
  • Growth potential
  • Local demand
  • Your specific goals and risk tolerance

Investing in diverse geographic areas will help investors balance strong performance in one market with potential losses in others.

Loan types

A mix of fixed-rate and adjustable-rate investment loans will help investors balance stable sources of income with the potential benefits of lower initial rates or cost savings over time.

Fixed-rate loans can offer predictable income and protection against rising interest rates, while adjustable-rate loans can offer potential cost savings, depending on market fluctuations.

Varying levels of risk

As we discussed previously, investors determine their own risk tolerance based on their financial stability and goals.

But you can use this risk tolerance as its own diversification strategy by striking a balance between conservative investments and more “aggressive” moves.

For example, a conservative approach might involve a fixed-rate loan on a property in an established market, while a more aggressive approach involves properties with growth potential in emerging markets.

Ideally, striking the right balance means the portfolio’s risk profile matches your level of comfort while also earning desirable returns.

Start diversifying today with Compass Mortgage

Compass Mortgage offers a range of loan products for real estate investors, including:

  • Conventional mortgages
  • FHA loans
  • VA loans
  • Home equity loans (HEL) or home equity lines of credit (HELOC)

While conventional mortgages are the most popular type of loan for investment properties because they offer the greatest amount of flexibility, borrowers in specific lending scenarios still have options.

The first step is to submit your loan scenario to the loan professionals at Compass Mortgage so we can evaluate your situation and offer personalized assistance.

We offer a unique program known as Get Committed®, which offers borrowers a fully underwritten loan commitment that locks in an interest rate even before the buyer finds a property.

There are standard pre-approvals, but then, there’s Get Committed® which secures your financing for you. And, it means we can close on your loan in as little as 15 days!

Reach out to Compass Mortgage today to experience our simple, personalized loan process and commitment to excellence in everything we do. 

We can’t wait to match you with the perfect loan for your next investment property.

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