Real estate can be a valuable investment, especially if you actively manage your investment portfolio. Just like with any investment, it’s important to rebalance that portfolio periodically. But what exactly does this mean and how do you do it?
What Is Portfolio Rebalancing?
What does it mean to rebalance a portfolio? Essentially, you’re going to be reallocating your existing resources in a different way. As a simple example, if you have 70 percent of your holdings in stocks, and 30 percent of your holdings in bonds, you might reallocate to have 60 percent of your holdings in stocks and 40 percent of your holdings in bonds.
In short, it means moving things around in your investment portfolio.
These are the most common ways that investors rebalance their real estate portfolios.
- Asset classes. For starters, property investors sometimes become overfocused on real estate investing. If you want your portfolio to perform as optimally as possible, it’s important to diversify it with many different asset classes. If you want exposure to different markets, you can also invest in stocks, bonds, ETFs, and real estate investment trusts (REITs). You can even buy jewelry, such as engagement rings or family heirlooms if you want to get some exposure to the world of precious metals and precious gems.
- Types of properties. You can also diversify the real estate portion of your investment portfolio by purchasing different types of properties. Residential and commercial properties have different pros and cons associated with them, so you can mitigate risk by including both in your portfolio. The same is true of single-family and multifamily homes.
- Geographic locations. Portfolio diversification in real estate also means getting exposure to different geographic locations. Different cities, different states, and even different countries have radically different levels of real estate performance. If you only invest in one area, and that area suffers a massive collapse, you could lose everything. It’s much better if you distribute your holdings across many different areas.
Why Rebalance a Real Estate Portfolio?
Why is it important to spend time rebalancing your real estate portfolio?
- Analyze performance. First, this is a crucial opportunity to analyze your past performance. How much money have you generated from your existing properties? How are your investments performing now, and how does that compare to your initial expectations? Do you have specific holdings that are overperforming or underperforming? Are there specific tactics that are working or failing? This is your time to find out.
- Diversify your holdings. Portfolio diversification is one of the most important fundamentals of successful investing, since diversifying your holdings reduces your risk, stabilizes your income, and ultimately helps you see better returns. Is your portfolio sufficiently diversified? If not, a simple rebalance can fix it.
- Realign with your current risk profile and goals. It’s also important to recognize that your goals and risk tolerance are going to evolve as you age. Typically, as people get older, they need to move to less risky assets, increase income consistency, and generally prepare for retirement. Rebalancing on a periodic basis allows you to gradually realign with your current risk profile and goals.
When to Rebalance Your Real Estate Portfolio
How often should you be rebalancing your real estate portfolio?
This is a process that should happen regularly, but it doesn’t need to be especially frequent. Depending on how actively you manage your portfolio, how often your goals change, and the size and scope of your portfolio, you can probably rebalance only once per year. However, it’s important to put a consistent process in place so you never go too long without rebalancing.
How to Rebalance Your Real Estate Portfolio
What are the actual steps you need to go through to rebalance your portfolio?
- Take an assessment. Everything starts with a thorough assessment. You need to understand your current assets, your current risk tolerance, your current short-term and long-term goals, recent asset performance, and market dynamics in any asset class you’re considering. The more thorough you are, the better, so this is usually the most time-consuming portion of a rebalance.
- Sell, if warranted. There are many different reasons to sell assets in your portfolio. If they performed exceptionally well, you may want to capitalize the gains. If they’re underperforming, you may want to cut your losses. You may also just want to raise funds so you can buy something else.
- Buy new assets. Finally, you’ll be ready to buy new assets. What asset classes are you missing? How can you make your real estate portfolio more robust?
Rebalancing your real estate portfolio isn’t the most exciting aspect of investing, but it is one of the most important ones. If you can master the arts of assessment and rebalancing, you’ll be in a much better position to see the returns you want.