3 ways to diversify your investment property portfolio
So, you want to be a property mogul and have a bunch of investment properties. We love it and we support you.
Asset diversification (aka – not having all your eggs in one basket) should be part of the conversation when you are on your property purchasing journey to help with risk minimisation.
While we’re on the topic of risk minimisation we want to quickly chat about over leveraging. Some brash property investment strategist will speak highly of leveraging people up so they can own as many properties as possible, as quickly as possible. This is called the ‘I own 20 investment properties which total $8m, of which I owe $7.99m on’ model. We have seen globally now more than ever that people need to be careful overextending themselves.
Here are 3 different ways you can diversify your property portfolio.
Diversify by investment strategy
We’re talking own a property for capital growth potential, another for cash flow and another for value-add opportunities. All 3 options have various short term and long term pros and cons, and many come back to cashflow, so it’s important to look at your financial position. A lot of buyers we speak to want the ‘perfect balance’ of high rental return and high capital growth, however these unicorns are very hard to come by – or else we’d all be buying them. We find buyers looking for this holy grail are looking for a very long time. It’s better to buy a property for one particular strategy and focus on buying another for a different strategy.
Both the capital growth and cashflow strategies can include the value add proposition. Value add can be through cosmetic upgrades, renovations, extensions, and subdivisions. We think having the ‘value add’ strategy in any purchase is a great way of investors to ‘manufacture’ growth, rather than relying on the market.
Diversify by asset class
Retail / residential / commercial / industrial properties.
The most common class people buy in is residential, due to the fact that historically they have had higher growth rates than commercial. However, for people closer to retirement or for people who want to buy an investment property in SMSF they often look to the commercial sector due to the strong cash flow for passive income. A net rental yield of a residential property can range from 2-4%, whilst commercial can be 7-9%, but commercial assets can sometimes attract higher vacancy rates.
Diversify by location
This can mean different states, but it can also just mean different areas within a city.
It is important to note for people looking at location to diversify their portfolio, that they keep in mind some fundamentals of any given area. Access to transport, government infrastructure spending, population growth, lifestyle elements and the availability of land (including rezoning).
Other things to consider
Always get landlord insurance. Both for loss of rental income and for building damage.
Look into getting a tax depreciation schedule on each investment property.
Always speak to your accountant before you purchase as they may want you to sign the contract under a company or trust name, not your personal name (for liability and other tax implications). Always speak to your bank or broker to get the right investment loan.
Go get ‘em.
Tabitha Robb