No matter the investment choice, you would already have heard the saying, “don’t put your eggs in one basket”. Whilst this is a well-used adage, it is still very relevant today, particularly when it comes to real estate investing.
What we’re talking about is diversifying your real estate and property portfolio. So, what does diversification mean for real estate, and what are the benefits of diversifying your portfolio?
So, what does diversification mean for your investment portfolio?
Diversification is pretty straightforward – it means varying your assets.
If you already hold one or two property investments, before you make your next investment decision, it is important to look at your portfolio as a whole and ensure that it is diversified. Diversifying your portfolio means that you should not concentrate all your investing efforts into the one area, as this could result in losing everything. Even if the area has been seeing great returns, there is no guarantee that the future performance will also reflect this, and if the market turns, you have no fallback in your remaining portfolio.
What are the main benefits of diversifying?
Fear of losing money is the number one reason that people are hesitant about investing but if you diversify your portfolio with the locations you are investing in, types of markets, investment strategy, and the types of properties, then you will be reducing the overall risk of losing everything in your portfolio.
Diversifying your portfolio will also help if one market declines or a property does not perform as you expect because another property in your portfolio may outperform, which can provide some protection against major losses.
We have learnt this from past mistakes because this is what we have during the mining boom when the property markets in mining towns were skyrocketing, and many investors rushed to buy multiple properties in one location because they were seeing such great returns. Then, when the mining boom was over, the property markets in these towns also fell, and property owners were unable to sell their investments and they lost their entire portfolio (and many people lost their entire retirement savings).
If something seems too good to be true, it often is – which is why investors need to be cautious when throwing all their hopes into one investment.
What are the risks if you don’t diversify?
The main risk of investing everything into one location is that if the one market falls or becomes vulnerable, then you will risk losing everything.
Ways to diversify your property portfolio
There are a few ways to diversify your property investment portfolio:
Location
This means to not buy all your properties in the one area- usually this refers to more than just the same suburb, but the whole region. Try to invest in multiple Local Government Area’s (LGA’s). You can also diversify by buying across multiple States as the market performance varies significantly across States due to Government spending and infrastructure, and the demand for properties due to migration.
Market
When diversifying based on the type of market, this means to buy across a range of capital cities, regional towns, inner, middle, and outer ring suburbs.
Strategy
Diversifying based on strategy means to hold some cash flow properties in your portfolio along-side some high capital growth properties and positively geared properties.
Property Type
You can invest in a range of property types such as houses, apartments, duplex units, townhouses, studio apartments, etc. It is wise to not just invest in apartments but spread your investments across houses as well because houses will benefit from the appreciation of the land value, but apartments will usually be cheaper and low maintenance.
Is there any case when diversification is not suitable?
Yes! Although we advocate portfolio diversification this is not possible if you are buying just one investment property.
When you are purchasing your first investment property, you should be looking for quality over quantity of your investment. You should be buying the best asset for your budget if it meets your investment strategy. Buying one quality asset is much better than trying to diversify and buying two cheaper but average-quality properties.
However, if this is your case, you would likely be expecting to buy future properties to create an investment portfolio which is the reason why employing an experienced buyers’ agent can help you to create a long-term plan and strategize what would be a quality property for your first investment and a diversified choice for your next investments.
