How do you balance your portfolio?

1 Why balance your portfolio?

Balancing your portfolio helps you achieve your investment goals and protect your wealth from market fluctuations and unforeseen events. By diversifying your portfolio, you can reduce your exposure to specific risks, such as vacancy, tenant default, or regulatory changes, that may affect one property type or market more than others. By allocating your capital wisely, you can optimize your returns, cash flow, and liquidity, and take advantage of opportunities that match your risk appetite and time horizon. By managing your risk, you can mitigate the impact of volatility, leverage, and debt on your portfolio, and avoid overstretching your resources or missing out on growth potential.

2 How to diversify your portfolio?

When diversifying your portfolio, there are several dimensions to consider, such as property type, market, and strategy. Property type can include office, retail, industrial, multifamily, or hospitality. Market could mean cities, regions, or countries. Strategy can encompass core, value-add, or opportunistic. For example, you may want to balance your portfolio with some stable and income-generating assets like multifamily or industrial and some cyclical and value-added assets like office or retail. You might also choose to invest in both core and mature markets such as New York or London and emerging and growth-oriented markets like Austin or Singapore. Additionally, you may opt for a mix of low-risk and low-return core assets like stabilized and well-located properties and high-risk and high-return opportunistic assets such as development or distressed properties.

3 How to allocate your capital?

Allocating your capital is the process of deciding how much money to invest in each asset, market, or strategy, based on your expected returns, cash flow needs, and risk tolerance. There is no single approach for capital allocation; however, some of the factors to consider are target return, cash flow, and liquidity. To assess target return, you can use metrics such as internal rate of return (IRR), net present value (NPV), or cash-on-cash return (CoC). For cash flow, you can use metrics such as net operating income (NOI), debt service coverage ratio (DSCR), or dividend yield. To measure liquidity, you can use metrics such as capitalization rate (cap rate), loan-to-value ratio (LTV), or exit strategy. By considering these factors when allocating your capital, you can ensure that you are investing in the most profitable and secure investments.

5 How to monitor and adjust your portfolio?

Monitoring and adjusting your portfolio is the process of reviewing and updating your performance, allocation, and risk based on changing goals, market conditions, and opportunities. You should do this regularly, at least once a year, to ensure that your portfolio remains aligned with your objectives and expectations. This includes evaluating portfolio performance against your target return, cash flow, and liquidity; comparing it with the market benchmarks and peer groups; identifying any gaps or strengths in your portfolio diversification, allocation, and risk; and implementing any necessary changes to improve portfolio performance or value. Balancing your portfolio is an ongoing process that requires constant attention and adaptation. With the tips and best practices provided in this article, you can balance your portfolio effectively and efficiently in order to reach your commercial real estate investment goals.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?