Why it is crucial for property investors to diversify their portfolio

Introduction

Investing in property is a major decision.

However, it is one that comes with a number of benefits. Having a diverse property portfolio is even better – providing you with a varied income and protecting you from risk.

In this week’s blog post, we will discuss the benefits of diversifying your property portfolio, and how you can do so.

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Diversifying your property portfolio provides a number of benefits. For example, if you are a property investor you will receive certain tax benefits possibly, if you rent out the property you will have money coming in from rent, and also the land or house will appreciate in value – meaning you make money when you eventually sell.

Furthermore, if you have a diverse property portfolio, you in fact may face less risk when it comes to each specific property market. For example, if you only invested in the Victorian housing market, and the WA housing market rose to be higher, you would have missed out on potential capital.

Though you may currently be having a lot of success in a specific property field, it is still important to build a diverse portfolio in order to lessen risk.

In addition to this, whether you are just beginning in the investment game, or have a number of properties already, you should be diversifying from the get-go.

Thus, you should be thinking about the purpose of your investment and the goals you want to reach financially right from the start. An example of this would be a buyer who makes lots of money may want a smaller tax bill, and so buys a to build property or a new property in order to utilise depreciation to increase their deduction at tax time.

It is also important to budget from the start, as cash flow makes all the difference. You want to make sure that you are financially secure and are able to purchase further houses or land.

If you fit this criteria, then it would be a good idea to diversify the property portfolio you currently have to lessen any risk exposure you could be subject to.

As the flow of cash is so important, it is necessary to search for – if possible – positively geared properties.

Otherwise if you can, aim to eventually buy positively geared houses, and be able to use rental income to pay for your own mortgage and other costs as well as add to the passive income you are currently receiving, you will be on the right track.

There are several steps you can take to build a diverse property portfolio.

One method is to buy a variety of types of property, for example residential or commercial.

Otherwise, you could buy land or housing in a diverse range of places, such as regional and metropolitan or in a number of states.

It is also important to make sure that you improve the property you buy in order to increase its value, for example you can renovate a rental property in order to have a higher income from rent and to eventually sell it for a higher price.

When choosing your investment property, make sure it is one that you will be able to increase the value of – whether this be through development, renovation, or subdivision. This way you will not have to pin all your hopes on the housing market increasing.

At the end of the day, make sure that you do the research.

Sometimes it can take a bit of time to find it, but there will always be something to be gained in the property market no matter the current conditions.

If you are moving into a property type that is outside your prior knowledge in order to diversify, it is crucial to make sure you have researched exactly what you need to know. It is vital that you do not buy simply because everyone else is – buying because of ‘FOMO’ is a bad idea.

Instead, research to achieve success by talking to established property investors who are doing well, examine the suburb you are wanting to buy in for possibly under-valued homes, go to property seminars – though remain cautious of property sellers who make unattainable promises – and talk to a real estate agent and the local council to get to understand any future shift in the area – such as zoning or the building of public transport – which may eventually make the property worth more.

Ultimately, the most important thing to remember – what you could call ‘the golden rule’ – is that while buildings will depreciate in value, land will appreciate.

Key points

Below are several key points to help ensure you remember the most crucial aspects of this week’s blog post.

• Investing in a diverse range of properties can benefit you by helping your portfolio lessen it’s exposure to risk.
• Consider investing in commercial and residential properties across a variety of states, regional, and metropolitan areas.
• Researching the area and the future potential of the property is vital.
• Land appreciates, though buildings depreciate.

For anyone who is unsure of their financial position when it comes to investing, it is best to speak to a financial advisor or your local mortgage broker.

Conclusion

In conclusion, if you choose to diversify your property portfolio, a number of benefits could befall you.

Furthermore, it could protect you from risk and give you a varied source of capital.

If you have any questions or concerns regarding this topic, please get in touch with the friendly team at AA Finance Solutions for help and support.