Diversification is a common strategy used by property investors looking to grow their portfolio. The strategy involves investing in properties that differ in price, location, and style – ultimately minimising risk whilst maximising growth opportunities. A diverse portfolio will help balance external factors – both positive and negative – that the market may endure over a long period of time. By having assets spread across a number of different investment types, your overall financial position will be less volatile.

How to diversify your property portfolio

Location

It is easy for an investor to favour an area that has proven to be successful for them in the past by providing strong capital gains or high rental yields. However, investing in the same location several times over makes you more vulnerable should natural disasters, population fluctuations or declining employment rates occur. If all of your properties are experiencing the same economic or market changes, it could place strong financial pressure on your assets.

Price point

Another diversification strategy involves purchasing properties at different price points, providing more flexibility should a property need to be sold. Instead of purchasing a property with your entire budget, splitting this over two assets allows you to free up cash by selling one asset, instead of two. It is important to note, diversifying your property portfolio does not mean compromising on the quality of your investment – quality always trumps quantity for long-term investment goals.

Style of property

The benefit of investing in different style properties, is appealing to different segments of the market. For example, purchasing a townhouse in a suburban area will attract the right rental market and candidates. Both re-sale potential and rental demand will benefit from purchasing the right style property in the right locations.

Residential vs. Commercial properties

The fourth diversification strategy is purchasing commercial property as an alternative to residential assets. Investing in commercial property is more focused on rental return of the asset and the security of tenure which is directly linked to the covenant on the property. Generally speaking, net returns are higher for commercial than for residential meaning that most outgoings are paid for by the tenant.

Although investors may not be able to control the property market, local environmental changes, infrastructure or the economy, they can learn to minimise risk within their portfolio through diversification.

Contact CPS Property today to learn how you can offset risk through diversification of your property portfolio.

Posted in Property investment on 2nd March, 2016 | No Comments »