Investing in anything poses risks, & property is no different: it’s a fluid, long-term asset. Just as financial specialists recommend a diverse investment portfolio as a way to reduce risk and increase gain, the same can be said for your property portfolio. Diversifying your property portfolio reduces the risk of investing in property and supplies some extra benefits to boot.
Keeping it interesting
Basically, diversifying your property portfolio avoids that old pitfall of putting all of your eggs in one very expensive basket. You can diversify in several ways. One is to consider location: if you put all of your money into one suburb and then that suburb undergoes a major infrastructure change – for example, the airport flight path changes and planes are suddenly and regularly flying over your property or (insert any other worst-case scenario here) you’re in a little bit of an investment pickle. If you spread your investments over different locations, though, you’re also spreading out the risk, thereby decreases any possible negative impact.
Also glance at buying at different prices. This is mostly relevant when you want to free up equity but still maintain a strong asset in your portfolio. For example, let’s say you have $900,000 to spend on property. If you purchase a property for $600,000 and another for $300,000, you’ll be able to sell the $300,000 property and free up the equity if required (or desired) while the other property keeps accruing income. Once again, you’ve dispersed your risk and opened yourself up to a win-win scenario.
Buying at different price points also means buying into different property types, as, generally, an apartment or townhouse costs less than a house. Another benefit of this approach is that each property type pleads to a different demographic.
You can also look at spreading your investments across commercial as well as residential properties. There are large differences. For example:
Commercial leases are usually longer than residential ones
GST applies to commercial properties
Commercial properties have higher yields than residential homes
With commercial properties, the tenant typically pays the maintenance costs.
With these diversities in mind, do remember that you need some level of proficiency when investing in commercial properties.
Lastly, don’t forget the golden oldie when trying to diversify – quality over quantity. If you have $900,000 to spend, don’t buy four cheap properties; instead, select fewer, good-quality properties.
High maintenance
Yes, diversifying your property portfolio is obviously more complex than throwing your money into one venture, so you may want to employ a property investment manager to help you along.
Diversification heavily reduces risk and allows you to free up money as necessary. (If you’re considering your retirement, it’s particularly pertinent.) Also, investing across a number of properties means that you won’t get slapped with one large sum in capital gains tax; instead, it will come in smaller doses and offer you a more manageable time frame.
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