As every successful property investor knows, a balanced portfolio is a strong portfolio – and the key to balance is diversity. By actively targeting a variety of investment opportunities, you make your returns less dependent on the movements of individual markets. You also increase your ability to achieve consistent growth by capitalising on the strength of different market segments.
But what are the best ways to increase the diversity and improve the balance of your portfolio? Here we look at the three main approaches adopted by many of Australia’s most experienced investors.
Diversifying by location
While we often talk about the Australian property market as a single entity, it rarely operates like one. In fact, there will always be areas where property is comfortably outperforming the national average. Conversely, there will also always be areas where current property performance is well below the national, or even state, average.
As such, focusing all your investments in one location leaves you highly exposed to local market movements. This may be alright in the short term, particularly if an area is booming and the local market is strong. However, over time, local activity will slow, and your returns will stagnate or, even worse, start to go backward.
To help prevent this, you can plan to invest in properties in distinctly different areas. For example, your portfolio could include a mix of inner city and regional properties to capture both the commuter and lifestyle markets. Or you could spread your investments across multiple states to tap into the benefits of buying in different jurisdictions.
Diversifying by property type or asset class
In much the same way different locations go through peaks and troughs at different times, so do different property types. For example, there will be periods where freestanding homes are in high demand, but the apartment market is lagging. There will also be times when apartments outperform freestanding houses, as more people look for affordability and convenience.
While these trends will often be quite localised, they can also impact multiple markets or even the whole country. As such, focusing on a single property type, even if across several locations, can leave you susceptible to market movements. To avoid this, you can plan to include a mix of freestanding and higher density properties in your portfolio.
Depending on your risk appetite and investment goals, you may also want to look beyond the residential property market. Due to the higher yields they can usually achieve, commercial properties are a particularly popular choice with investors. You could also consider investing in industrial or retail properties, though these asset classes tend to have higher vacancy rates.
Diversifying by expected returns
As part of setting your overarching investment strategy, you will usually define the kind of returns you want to achieve. For example, if your goal is to quickly build a large portfolio, you may want to focus on maximising capital growth. Alternatively, if you are getting into investing to supplement your existing income, you could choose to target high yielding properties.
While your strategy should guide your investment decisions, being too single minded about it can actually inhibit your returns. For example, if you only consider capital growth potential, you could find yourself having to cover significant short-term losses. Similarly, unless you use it to continue growing your portfolio, maximising your rental income can limit your long-term growth.
With that in mind, it is usually better to take a more balanced approach to the type of returns you target. This may mean looking for properties that should deliver strong capital growth and healthy rental returns. Or you could choose to invest in a mix of properties, with some focused on growth and others on generating rental income.
Want to discuss this further?
If you are worried about the balance of your portfolio, Search Party Property can help you add a little variety. We are experts in finding different types of investment opportunities and will guide you through planning your diversification strategy. To start this conversation, set up your free property investor assessment session today.