“Diversity comes in many forms and all are worth considering”
I remember a story several years back about an investor from Sydney who was lured to a booming mining town by stories of soaring house prices and almost unbelievable rents.
Convinced he was on the verge of making a fortune, he liquidated his mid-sized, reliable property portfolio in the city and put everything into a few houses in the piping-hot regional resources town.
For a while, he was the envy of his investor friends. Money was pouring in from rent – thousands of dollars a week thanks to a critical housing shortage – and he planned on offloading for a hefty premium in a year or so to the next hopeful investor.
But then, one day, the mine closed and sacked its contractor workforce.
The demand for housing evaporated overnight and he was left with no tenants, no rental income, and assets worth significantly less than what he paid for them.
All of his eggs were in one basket… and not a very good one at all for those of us who understand property investment fundamentals.
This is a perfect example of why you must diversity when it comes to property investment. But I’m not just talking about location alone.
Diversity comes in many forms and all are worth considering.
Location, location, location!
You’ll hear a lot of experts tell you to have a good mix of locations in your property portfolio, and it’s great advice for a number of reasons.
For one, investing in more than one town or city means you’ll reduce your risk should prices fluctuate.
Like with our friend in the example above, going all-in can have disastrous consequences – especially in inferior locations.
Real estate in Australia is not one single market.
It’s many, many individual ones that each have their own drivers, good and bad, and can be in wildly different places at any given time. One might be experiencing an upswing while another is in the midst of a correction.
On the flipside of this, spreading your portfolio across multiple locations also increases your potential reward, so it’s not just about risk.
Intimately understanding each market presents an opportunity.
Savvy investors will be on top of potential changes to price drivers – both up and down – such as infrastructure investment, zoning adjustments, major development, gentrification and localised supply and demand factors, to name a few.
This knowledge can help you to see growth or softening before it occurs.
Armed with this, you can make highly informed buying and selling decisions – and reap the rewards.
There are also benefits when it comes to reducing your land tax liability by spreading your assets across different states.
Diverse dwelling mix
A diverse portfolio isn’t about location alone. It’s worth looking at your personal situation, conducting a risk analysis and seeing whether a mix is required.
There’s diversity in dwelling types across residential, commercial and industrial, too.
A diversity of investment outcomes might also be important for you because focusing entirely on cash flow leaves less room for potential capital growth and vice versa.
And timeline is another factor when it comes to diversity.
If you’re looking at an asset that you think could have good development potential, say for a few townhouses, how long do you need to sit on it to realise the best profit? Is it worth waiting that long? Can you even afford to?
The more you think about portfolio diversity, the better you can understand your situation and what you need to do to lower the chance of mediocre growth and increase the likelihood of sustained wealth creation.
Know your appetite
Many of these questions surrounding portfolio diversity come down to your individual risk profile.
Those who aren’t in a position to take on riskier deals – people nearing retirement, families on one income, investors just starting out or those who are highly leveraged – might look at diversity in a different sense to an experienced small-time developer or experienced investor, for example.
Take our friend in the example above. If he really wanted to roll the dice on a mining town investment – not that we would ever advise to invest in one-industry locations – and he could weather the potential risks, he might’ve considered doing it in a way that retained his balanced portfolio and minimised any future fall-out.
Even if he’d not seen the tanking market coming, he would’ve lost considerably less by focusing on a diversified approach. He certainly wouldn’t have been left with absolutely nothing at the end of the day.
The type of different eggs you decide to put in your basket, so to speak, depends very much on your situation.
And as with any investment you’re considering, enlisting the help of highly experienced and accredited experts is always essential.
That’s because they can help you navigate the possible minefields and future-proof your portfolio with a healthy mix of assets across diverse locations and dwelling types.