Diversifying your investment property portfolio is one of the best ways to improve your chances of success as well as minimise your risk. Diversification is not just limited to the real estate market, but it is a tool used by investors in all sectors to mitigate risk exposure. With this in mind, it is important for you to balance risk and reward in your investment property portfolio. That said it is still very important to ensure that the direction of your diversification will help you meet your current and long-term financial goals. This guide will help you diversify your investment property portfolio.
Invest for capital growth
In the first place it is crucial to fully understand the short-term, medium-term and long-term projections for your potential investment destination. For this you will need to consult a financial as well as property expert so you can figure out the long-term growth forecasts. Residential property investment is extremely good for long-term capital growth. However- this is primarily dependent on housing trends, economic activity as well as housing demand in that market. In addition, aside from normal wear and tear, your investment is not likely to reduce in value.
Invest for cash flow
If your main agenda is to generate high cash flows as part of your diversification efforts then it is important to understand the property market. As you consider your diversification options, assess the market forces of supply and demand for the rental type within an area. Keep an open mind as you look for areas and properties to invest in. This accords investment property owners the opportunity to widen their portfolio base. Generally, investors will look to invest in capital cities due to the lure of high property demand. In spite of this there are certain circumstances that give rise to areas outside the main cities earning you very high cash flows. With this in mind, always be on the lookout for economic activity that can lead to higher cash flows in areas outside the main cities.
Asset classes
One of the best means by which you can diversify your investment property portfolio is to invest in a wide range of properties. This way whichever of the property types gains in value or returns, you are set to benefit. Moreover, if one or more property type is not doing well, the others will cushion it/ them. Most often people only consider investing in houses and flats as sufficient diversification. However, commercial property investment also offers a wide range of pros that you could benefit from. Whichever way you decide to build your mixed portfolio of properties make sure you understand the associated benefits and setbacks. This knowledge will assist you in making a more informed and calculated decision. Keep in mind that any additions to your property portfolio must keep in line with your overall investment strategy.
Geographical
Another excellent way to protect your investment is to spread your investment geographically. This might entail investing in property in different areas, regions and countries. When you diversify your investment property portfolio you are set to enjoy the associated profits from each area. When you choose to invest in a different country ensure you understand the legal aspects of the investment. In addition, remember exchange rates. These will play a big role in your purchase price as well as your rental income. Property management will be easier if you buy your initial properties closer to you. However, with time and after procurement of a few investment properties it is important to spread the risk around and invest in property in different geographical locations.
The benefits of diversification
The three main benefits of investment property diversification include;
Reducing the risk of loss
Your capital is not concentrated in one investment type. As such, is one investment performs poorly over a certain period of time, then other investments can cushion it. Subsequently minimising your losses.
Preserving capital
Another advantage of diversification is that you preserve capital and facilitate for the protection of your savings.
Generating returns
Diversification will aid you look at other investment types. This can lead to a higher return on invest and the opportunity to earn higher recurring income.
