How to Diversify within Property Investing?

When building a high performing portfolio, it is easy to get caught up on the returns each new property provides. After all, it is only natural to want each of your investments to deliver the greatest yield possible. But if you just focus on growth and income, you will overlook a key characteristic of all strong portfolios – balance.

Achieving balance in your portfolio takes a lot of research and plenty of careful planning. It also usually requires a reasonable level of diversification within your investments. Here we look at why this is important and the best ways to make this happen.

Why is diversity important?

The cyclical nature of the Australian property market means that every investment property will go through peaks and troughs. And when you have multiple properties that are quite similar, these highs and lows will tend to line up. As such, your overall returns will also be quite cyclical, moving with the ebb and flow of the market. 

However, when your portfolio is more balanced, you are less exposed to the natural dynamics of the property market. Having diversity in your investments means that you can offset losses on one property with gains on another. It also allows you to make sure that your investment is continually growing, even if certain market segments are not.

So, while diversifying your portfolio may mean compromising on short term returns, it will pay dividends in the long run. A more balanced portfolio will also usually deliver more consistent and predictable growth and income. This, in turn, makes it easier to manage your investments and plan your future property purchases. 

Different ways to diversify your portfolio

The good news is, there are several easy ways to bring balance to your portfolio as it grows. This includes targeting new investments that vary by:

• Location: The location of a property can have a significant impact on how it performs as an investment. We are seeing this quite clearly at the moment, with some areas experiencing major growth and others starting to decline. As such, spreading out where you invest is a good way to diversify your portfolio and balance out your returns.
• Property type: The performance of different property types (houses, apartments, etc.) can vary greatly at different times. This is driven by a range of social and economic factors and will usually be influenced by the property’s location. As such, investing in a range of different property types can help minimise your risk and stabilise your returns.
• Price point: Where a property sits within the market (i.e. how its priced compared to other local properties) can also affect its performance. For example, government schemes supporting new home buyers can drive an increase in demand for entry level properties. Conversely, strong wages growth or good lending conditions can increase interest in higher end homes. As such, buying properties at different price points will help ensure that one of your investments will always be in demand.
• Expected returns: Some investment properties will deliver strong growth, others will deliver significant rental income, and some will provide a combination of both. While your overarching investment strategy may be to focus on one kind of return, it pays to have a balance. As such, it is worth having both properties with higher yields and greater growth potential in your portfolio.

Want to discuss this further?

If you need help increasing the diversity of your investment property purchases, Search Party Property can help. Our experienced team of property professionals are experts in helping build strong, balanced portfolios that deliver consistent, predictable returns. Book your free strategy session today for more information on how we can help you achieve all your investing goals.