It would be hard to find someone who hasn’t heard the term “Don’t put your eggs in one basket”. It’s a proverb from the 17th century, when people would gather eggs from their hens. If you dropped your basket, you would lose all of the eggs, but using several baskets would mean you had more eggs to eat, in case you dropped one.
Not as relevant today in our fast paced urban lifestyles. Many of us don’t even have backyards, let alone hens to lay eggs. But that doesn’t stop modern finance people from adopting the saying to mean ‘the risk of losing everything’ when investing.
Nothing reduces the risk of losing everything, like diversification. It is essentially the act of putting your money into several different kinds of investments, just in case one investment was to go southward.
Property investment diversification is very much the same as any other investment vehicle. It involves investing into different property classes, property types, different locations and different property strategies to reduce the chance of loss.
Property class diversification
Property classes are direct property, real estate investment trusts, syndicates and fractional investing. Direct property is essentially ownership of the entire property, where the others offer partial ownership.
Success can be found in direct property alone, as there are plenty of property types which offers sufficient diversification. Only experienced investors venture into intangible real estate investment opportunities.
Property type diversification
Property types are residential, commercial, industrial, rural and specialised (hotel accommodation, retirement, student accommodation etc).
Each property type has different risk and returns associated with ownership, with residential being the lowest risk, rural and specialised being the highest. The risk can also change according to property and economic cycles.
Further diversification can be sought from different sub-types. For example, residential property includes houses, apartments, townhouses, duplex. The type of residential property selected for investment, depends on location, income, vacancy rates and growth potential.
Location diversification
There are many sub-markets within the Australian property market. Each state moves in different cycles to each other and sometimes even suburbs within a city have their own sub-market.
The best opportunities for diversification lies in purchasing property in different locations, to take advantage of the local market movements.
Strategy diversification
Success in property investing can be found with many property strategies. You may find a tried and tested strategy or venture into higher risk strategies for higher returns.
An investor might buy and hold the first several investments, then venture into subdivision or buy-renovation-sell to increase profits. With higher returns is higher risk, so the change in strategy must be suitable to the local property market.
There are not a lot of disadvantages to diversification. You may lose track of your properties as your portfolio grows, but this is a good problem to have really. Diversifying your property investments will not only give you opportunities to access different markets and higher returns, but it will decrease the effect of any bad performing properties in your portfolio.
If you need help diversifying your property investments, call us at JR Prosperity today on
1300 522 562. Everyday we help our clients to decrease investment risk and select the best performing properties for their portfolio.
