Diversification strategy 101: The benefits

Sustainable property portfolios are about distributing and minimising financial risk.  To do this, you must implement diversification.

This strategy involves spreading your risk across different property investments to increase the odds of investment success. Portfolios that are diversified can generate more money, protect your income and wealth and offer valuable long-term returns.

Although diversification won’t bring guarantees, it manages risks by investing in a mix of property types for more consistent profits. Here’s how to get started:  

Don’t put all your eggs in one basket

No doubt you’ve heard not to put all your eggs in one basket, before.

Why?

Because you open yourself up to the possibility of losing everything at once.

This is when diversification comes into play. Instead of investing in one area, create contrast with a geographically diverse portfolio. Don’t put all your eggs (properties) in one basket (area).

Investing in other states creates a larger pool of opportunities. Likewise, investing in a mix of residential and commercial properties and different priced-properties adds diversity. A strategic spread of properties spreads your wealth, leaving it less susceptible to volatile markets and investment fluctuations.

Although risks can’t be entirely eliminated, they can be managed to minimise potential losses against your investment portfolio.

Diversification reduces risks by ensuring you’re not left over-exposed in fluctuating markets. To achieve diversity, allocate investments into different asset classes of various sizes, industries and locations.

Generate returns

When you diversify your portfolio, positive returns are achieved in one market or location while the other market/area is at a loss. 

These market ups and downs are inevitable.

To avoid the worst of them, a good diversification strategy is valuable when properties don’t perform well. The more contrast you create in your portfolio, there more likely there are other properties that’ll perform better to cushion the blow from investments that are struggling.

Land tax

Property diversity can also minimise how much land tax you pay, which is one of the main reasons investors choose to diversify.

Land tax is state-based with different payment thresholds and rules for each. By spreading out your investment properties across various states, you accrue less land tax. This is because the value of your properties is spread between the different thresholds. But when you own properties in one state, there’s more chance of exceeding the land tax threshold.

Rentvesting

Rentvesting is a smart strategy that adds variety to your property portfolio.

It also comes with a number of benefits. 

If you invest in multiple properties profitability increases. As rental prices rise, so does your income whilst major expenses, such as mortgage payments, stay relatively the same apart from some minor fluctuating interest rates.

A strategy for more properties creates diversify in portfolios - which leads to more passive income for you.

Mix it up with residential and commercial

Including a mix of both residential and commercial property can be a great way to diversify your portfolio

For some investors, commercial real estate is a rewarding opportunity to add diversity and increase financial wealth. Done right and it puts you ahead of competitors who find commercial too complicated or outside their comfort zones.

Commercial properties can also have a stronger cash flow than residential properties, with value mostly based on their income return (capitalisation rate). This benefit, as well as longer lease terms commercial properties provide, makes it an attractive strategy for portfolio diversification. 

Why should I diversify?

Diversification is a valuable long-term strategy for building investment portfolios. 

It’s not an all-or-nothing choice, but one which encourages a balanced mix in property portfolios. Other benefits include:

•          Take advantage of different market cycles

•          Lower risk by investing in different vehicles

•          Achieve financial freedom through owning many properties, which creates multiple income opportunities

•          Better access to more equity

•          Spreads wealth to build a healthier portfolio

A carefully-constructed portfolio can benefit from a skilful mix of properties to achieve investment goals. How will you take advantage?