The word diversification is often thrown around various industries and most people know it’s important. The real question you should be asking yourself though is ‘why’ diversification so important. Unfortunately, it’s not as simple as investing 50% here and another 50% there, and in property, there are a plethora of factors that weigh in to determine the best diversification strategy. The number one thing you need to understand in terms of diversification is timing.
The reason that timing has such a correlation to successful diversification is that it is the key factor that determines both micro and macro environmental factors occurring in each market. Furthermore, it is the micro and macro-environmental factors that signify whether a particular area or suburb is in its declining, opportunity, or boom phase. For example, buying a property in an area that has already reached its boom phase is detrimental as the only direction that comes after a boom is a decline. This might happen after the demand for a particular location has already hit its all-time high (peak), and supply and demand have met an equilibrium.
The trick here is to find areas where properties are sitting in the opportunity phase. This essentially means you are investing in an area that is on the crux of a boom. Many factors determine what ignites the boom including variables such as economic, demographic, and social-cultural factors to name just a few.
After you have understood the property cycle and its timing, you can then look at how you wish to diversify your property portfolio. The most obvious is of course by geography; there are hundreds of smaller property markets all at different stages of the property cycle around our country. By investing in various areas, you are front-footing potential hazards or changes in both macro and microenvironmental changes that may occur. For example, one property in an area may plateau for a period due to a natural disaster but the second property in another location may increase exponentially due to buyer demand in that area. In short, you have your bases covered.
The second way in which you can diversify your property portfolio is to buy into various asset classes. Property has several different asset classes including residential, commercial, industrial, and retail. Residential property is the asset class that typically comes with the lowest risk, and it is also the most common asset class that property investors turn to when starting out. However, as you begin to build and develop your property portfolio you might consider seeking out other opportunities such as investing in commercial properties which often yield a higher return, though come with greater risk. Again, by investing in various asset classes you are safeguarding by not putting all your eggs in one basket so to speak.
The final option I want to touch on is diversification by property investment strategy. Property investors can diversity through strategy by having a mix of properties that deliver capital growth, cash flow and present opportunities such as development potential. Determining the strategy that is best suited comes down to understanding the personal circumstances of the individual wanting to invest. However, it can be a good method to safely build your asset base and portfolio.
Diversification of your property portfolio is not only smart, it’s the only way investors can truly mitigate risk and increase returns of their property portfolio. At Bolt & Hunter, our team does the leg work and intricate research to gain an in-depth understanding of what the market is doing and the micro and macro-environmental factors that will determine the best diversification strategy for you. Our gauge on the property cycle and the timing of it allows us to help investors minimise volatility and increase performance over the short- and long-term picture. If you’d like to speak to one of our expert team members about how we can start diversifying your property portfolio get in touch.