Investment Diversification: Can My Real Estate be at Risk?

Are all my Investment “eggs in one basket”?
Diversification or balance in an investment portfolio can be critical to success as market conditions change and shifts take place.  There can be great increases when the market is going up, but unfortunately when an economic downturn occurs, it can lead to severe financial loss.  A large percentage of successful investors will not restrict their holdings to just one type of investment (i.e. stocks, bonds, mutual funds, etc).  Investors tend to include investment Real Estate to create diversification or a well balanced portfolio.

Is my Investment Real Estate portfolio Balanced?
Real Estate has proved itself for decades as an attractive investment.  But can I create added risk if I own only one property type?  For example, if I own only single-family rentals, can I be missing out on greater cash flow as opposed to owning multiple unit properties?  What about vacancy possibilities?  The risk could be lessen in multi family as opposed to a vacant single-family rental, which generates no rent.  But what if the residential market turns flat; could I have done better by complementing my holdings with some Retail or Commercial property?  Different property types or a Balanced portfolio can be a strong contributing factor to economic Diversification.

How about Geographical Diversification?
When one accumulates investment real estate in a concentrated geographical location (usually near to where the investor resides), possible dangers can derive from natural disasters concentrated in that particular area (Earthquakes, Fires, Hurricanes, etc).  Those properties as a whole can be at risk or potential great loss within that environment because all holdings are in a concentrated geographical area.  What happens if that particular district becomes economically sluggish and other counties of the State or regions of the Country are thriving because of business expansion?  Perhaps that investor can be missing out on great appreciation opportunities.

The §1031 Tax Deferred Exchange is a method to achieving property diversification, and is one of the last tax shelters allowed by the Internal Revenue Service.  It is a transaction in which a taxpayer exchanges investment property for like-kind investment property, which defers the payment of Capital Gain Taxes and the Recapture of Deprecation Tax.  The IRS defines like-kind property as all real property held for investment purposes, or the productive use in a trade or business.  This basically includes any real estate held for investment except your primary residence and second family home.  This creates more buying power for the taxpayer than if the Capital Gains Tax was paid, and possibly creates a new schedule of additional Deprecation to take advantage of.  By deferring the payment of Capital Gains Tax, the taxpayer gets to invest the owed Tax dollars into the replacement property interest free from the IRS and State.  The 1031 Tax Deferred Exchange also avoids the California Withholding Tax.

For more information, please call 1-888-991-2247.  We are always happy to help.