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Why You Should Diversify Your Investment Portfolio of Single Family Homes


The reasonably prudent investor – lets say that’s you – may diversify your portfolio by asset class – stocks, bonds, mutual funds, ETFs, alternative investments, and real estate, for example.

Why Real Estate

As an asset class, real estate returns have been largely uncorrelated with stocks bond, and treasury bills. the accompanying chart shows, the correlation between an investment in private real estate for the yeas 2000 to 2014 was only 0.18. (If the long-term growth of the two asset classes were identical, the correlation would be 1.00)

Source: NCREIF. The NFI-ODCE, short for NCREIF Fund Index - Open End Diversified Core Equity, is the first of the NCREIF Fund Database products and is an index of investment returns reporting on both a historical and current basis the results of 33 open-end commingled funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. The NFI-ODCE Index is capitalization-weighted and is reported gross of fees. Measurement is time-weighted. NCREIF will calculate the overall aggregated Index return.

You can also diversify your real estate portfolio with commercial real estate, multi-family apartments, duplexes, REITs, real estate mutual funds, and discounted mortgage notes, to name a few. And you can diversity within those categories, too.

But that’s not all. You can diversify your single-family home portfolio by region state, city; size and age of home; and by lease term and type of tenant.

You can also invest with a long-term buy and hold strategy, a rent to own option, or you can concentrate on rehabbing homes for quick profit potential. The buy and hold strategy can be different as well - some homes can be acquired with more of an eye toward current cash flow and yield while other properties may be acquired with an eye towards appreciation. The balanced portfolio will try to blend both of these attributes.

Here are three potential benefits of a diversified portfolio of single-family homes:

Influence

With stocks and bonds, most investors, unless they can influence shareholder votes, have little to no ability to alter the course of a securities’ growth or decline. Ho

wever, real estate is a tangible asset. You can take action to increase its value or improve its performance. You can update the kitchen, improve the landscaping, and replace non-paying tenants with higher quality tenants.

Income

A diversified portfolio of single-family homes may also help smooth out potential ups and downs in your cash flow. The monthly income from some properties will be like home runs, others may be doubles, and others may be strikeouts. How much money can you make each month on a property? It depends, of course, on the property, the rent, loan terms, renovation and maintenance costs, taxes, and the original purchase price.

Appreciation Potential

Investors in real estate can also benefit from the long-term increase in property value. Location, as always, is key. As an example, home values in the Chicago metropolitan area, for example, increased 5.6% from August 2014 to January 2015; and may increase 9.0% over the next five years, to reach September 2005 levels. (Source: John Burns Real Estate Consulting.)

For more information on why you should consider investing in a professionally managed portfolio of single-family homes, please contact Harold Willig at 917-209-4452 or harold.willig@springviewinvestments.com

Harold Willig is the Manager of SpringView Investment Management, LLC, which he founded in 2012. Mr. Willig also served as HFZ Capital Group’s Chief Financial Officer, and was responsible for the oversight of HFZ's Finance and Accounting team. He has over 16 years of finance and accounting experience. Mr. Willig also ran a consulting practice and provided valuation, analysis, and transactional support services to multi-billion dollar real estate companies. Previously, Mr. Willig served as the Senior Controller and Vice President of Financial Analysis and then the Chief Financial Officer of the Athena Group, a multifamily development company and fund manager.

This post does not constitute investment, tax, legal, or real estate advice. It is not a recommendation or an offer to buy or sell. No warranties implied. Past performance does not guarantee similar future results.

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