How Diversification Will Help to Spread Your Investment Risk

by Prime Estate

A long time ago, my parents shared with me a proverb that still holds true to this day. This profound piece of advice can be applied to many areas of life, but one area in particular is the property market.

“Don’t put all your eggs in one basket”

In the investment world, the expression of not putting all your eggs in one basket means just one thing, diversification.

What are we referring to when we mention diversification?

In the property market, diversification refers to an extremely important process for investors.  As a way of spreading out the overall investment risk, many investors will choose to purchase properties based on varying locations, price points and property types.  The simple, but effective theory behind this is that if one property takes a downturn, the other investments might perform better thus minimising the overall loses.  Although diversification can’t guarantee that you won’t lose money if the market begins to suffer, it’ll significantly improve your chances. Through the process of liquidating a well-diversified property portfolio, it’ll help to ensure that the property will outperform the market and hold out against difficulties in the long term.

You can’t expect the same return on all property purchases. Some properties have higher yields whilst others have more capital growth. The idea of having a mix of property types is so you’re not exposing yourself to just the one category of return.

Ways to diversify your property portfolio

Diversify by location

A great way to diversify your property portfolio is to purchases assets in different markets.  By building a mixed portfolio of properties which are located in different areas/regions, you can help soften the effects of a suffering market in a particular geographical region.

Many investors will purchase their first couple of properties in areas which are most familiar to them, i.e. their capital city or state.  By only purchasing in these areas, it could mean that the investor is missing out on potential investment opportunities in other regions.

When property prices in one market are rising, there could be prices in another city that are declining.

Purchase properties at different price points

Let’s say you’re presented with an opportunity to purchase your ideal property for $1,000,000 or two top quality properties at $550,000 and $450,000.  Which one would you choose?

By purchasing two properties, it will give you the flexibility for if you need to free up cash in the future.  For example, you can sell one of the assets and retain the other as a means of generating revenue and building equity. By purchasing two separate properties, they can also help to spread out your tax burden – again coming back to not putting all the eggs in the one basket.

Buy different types of properties

When it comes to developing a mixed property portfolio, choosing different asset types should always be considered.  Generally, when most people think about different asset types, the first couple of thoughts they have are houses and apartments.  Although these can be great options, you should also consider other property types such as:

  • Villas
  • Townhouses
  • Units
  • Commercial properties

If exploring other property types is something you’d like to pursue, it’s always recommended to conduct a thorough analysis of the pros and cons of each property type.  When identifying the benefits and drawbacks, you should also ensure that the property type you’re going ahead with aligns with your overall investment strategy.

What you should always keep in mind

Regardless if you’re just starting out on your investment journey, or if you’ve got a well-developed and well-diversified property portfolio, a crucial lesson to learn is to never act with emotion.  When it comes to investments and property markets, all your decisions should be based on facts and reliable data. Emotion tends to blind our judgement and can quite often lead to uneducated decisions. It’s also important to ensure that each property works in conjunction with your objectives.  Avoid deviating from the objective and don’t be disheartened if the numbers aren’t working. Simply move on and investigate other property types, locations or price points.

There’s no need to rush

If you’re growing your property portfolio or even if you’re just beginning, it’s important to remember not to rush into it.  After all, property investment is a long term intention and you’ll be bound to experience peaks and troughs throughout the journey.   Finding the right investment property requires a sound combination of thought, time and research.  The process of purchasing any property won’t necessarily mean that it will align with your objectives or work in your favour.

When it comes to diversification, Prime Estate provides its clients with detailed assessments of each potential property which helps to ensure that the most appropriate asset is considered. For the majority of our investment clients that have a mixed portfolio of four or more properties, our team of licensed buyer agents have sourced and secured these properties on their behalf based on their specific investment objectives.

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