There are several factors which are important to investors when they choose a real estate project to invest in. These factors include transparency, profitability, liquidity, simplicity, and diversification. While the need for the first 4 factors is understandable, not everybody immediately sees the benefits of diversification. So why is it so important? Diversification helps reduce the overall risk by spreading it. Any single investment, no matter how good the prospects and potential, carries some inherent risk, such as sudden changes in the economic climate of the country, real estate market upward/downward growth, natural disasters, accidents and so on.
In any scenario, there is a way to reduce investment risks. How is this possible?
By choosing to invest in groups of properties instead of a single real estate asset. Investment in two properties gives a greater level of security because the potential for gains automatically increases if properties are located in separate places and have different sources of revenue, the HPI trends of the areas and so on. If you invest in more than two properties, the diversification of your investment portfolio becomes even higher. The logic behind this statement is obvious: don't put all your eggs into one basket.
By investing in a group of properties, investors are able to include different types of projects: a person may invest in both a renovation and a rental project, or combine these with a project that has good leverage or flipping potential, or a project in an area with developing HPI. The opportunities in these scenarios are higher, as there is a broader choice and a person does not have to painfully select just one project that he/she liked.
You may ask, where would a person with an average income find the money to buy a group of properties? Real estate is expensive, some people save up for years to purchase just one property, let alone a number of different real estate assets. The answer is property crowdfunding. This model allows investors to put in a small amount of capital spread across different properties, thus, they may benefit from various projects without having to make large outlay.
