Diversification is the key to a successful real estate portfolio. Whether you own real property or invest in stocks or real estate investment trusts (REITs), having your investment spread across multiple asset classes, markets, or several properties will almost always provide more security in the long haul and is the reason I personally think buying multiple investments is better than buying one big property. While a case can be made for either side, and there are undoubtedly benefits to owning one big investment over several small ones, below are a few reasons diversification trumps scale.
Reduce risk exposure
Diversification is a big benefit of investing in several smaller real estate investments upfront. You reduce your overall risk exposure because you can own different types of investments in different markets. For example, you can purchase free-standing office space in Austin, Texas, while also owning a duplex in San Antonio, Texas, and a single-family rental in Orlando, Florida. One city can see increased rental rates while another suffers from declining rents. Having your investments in different rental types and real estate markets means if one market tanks, all of your investments don't suffer.
Benefit from improved market opportunities
Just as diversification reduces risk exposure, it also provides you with the opportunity to take advantage of improved market conditions. If one real estate market is thriving with high rental demand and rates while another is remaining flat or declining, you gain upside while offsetting any downside.
Owning smaller investments also provides more flexibility and liquidity to the investor. If you own one large apartment complex or industrial warehouse and want to cash out, you have to list your entire investment in order to do so, which will get rid of any passive income or cash flow the property produced for you. Conversely, if you own multiple smaller investments, you can sell one or a few of them in order to gain the desired liquidity while still being able to collect and benefit from the other property's rental income.
Easier to get started
A lot of investors are getting started in real estate with a limited amount of money to invest. How much a starting investor has to spend will vary greatly, but for most investors, it's a few thousand dollars to tens of thousands of dollars. If you don't have hundreds of thousands sitting on the sidelines, buying smaller investments, such as a single-family rental, duplex, triplex, or fourplex can be a great way to initially participate in investment real estate and grow your portfolio over time. It's also a lot easier to get financing for residential real estate compared to commercial real estate, particularly if you're new to real estate investing.
When going big makes sense
There are times when going big makes more sense than staying small. If you're an experienced investor and have built a sizable portfolio of residential rental property, it may make sense eventually to cash out on some or all of those investments to purchase one or more big commercial properties. But even with commercial real estate, diversification is crucial. If you put all your eggs in one investment basket and the market turns, you could be in a tough position. If you're going to go big, make sure you have a long-term plan that provides diversification in the long haul with access to different property types or real estate markets.