Diversification is an important part of the property investing puzzle. However, it’s a little more difficult to achieve diversification with property, compared to shares. This video looks at ways to achieve a sensible level of diversification when building a property portfolio.
VIDEO TRANSCRIPT
Hi, I just want to talk to you about the idea of diversification when it comes to investing in property. So, a lot of people think it’s nearly impossible to get a decent level of diversification when you’re looking at real estate, and they compare that to the share market, where it’s a lot easier to buy a greater number of lower value assets and get that sort of diversification that way. But look, it’s not impossible, and I think that when you talk about diversification, it’s important to understand what it is that you’re actually looking to achieve. So, certainly when I’ve looked at diversifying my portfolio, the key driver in that is to get exposure to different markets, but also to make sure that I don’t have all my eggs in one basket, that I’m not exposed to just one property cycle, and the vagaries that can come along with that. So, look, when I’m looking at diversification for clients, and also for my own portfolio, what I’m looking at is a number of key things. Geography’s the obvious one, that’s what most people go to. So, spreading your properties over a number of areas and not just in one city, or in one state, or whatever it might be. So, as an extension you can look at diversifying across different geographic types. So, you could have something in a capital city, and then something in a regional area. You’re getting exposure to different growth drivers and different industries and stuff like that, but also, you’re getting exposure to different yield profiles, and one might be a little bit lower, and it might be a little bit more growth focused. One might be a little bit higher, but still have some growth in there as well. So, that’s something that a lot of people are across, and it makes a lot of sense. Another thing to think about though, is getting exposure to different property types. So, if you’re just investing in free standing houses, it might not be a bad idea to look at some other things like some sensible, smaller strata blocks, or townhouses, or whatever it might be, and only if it makes sense from your, for what you’re actually looking to achieve. But again, that’s a certain type of diversification that can be helpful for some people. Finally, a big one is, how are you going to finance these things? So, diversification across lenders, I think, is something that should be considered as well. And if it’s one or two properties, it’s probably okay if you’re with the same bank. There can certainly be some benefits for that, actually. But when your portfolio gets a little bit bigger, it’s certainly something that, you want to work with your investment savvy mortgage broker to really tease out what is a proper financial strategy around that. And that may well be that you’re diversifying your debt across a number of lenders. There can certainly be some benefits to that. It might not always be the cheapest way of doing things, but sort of from a risk point of view, it can actually make a lot of sense as well. So look, importantly, when we’re talking about diversification, we’re looking at minimising risk, or that’s the way I’m looking at it. So, if you look at it that way, then you’re not just looking at geography, you’re looking at property type, tenant profiles, industries, and all of that sort of stuff, and spreading your risk across all of that, and as I mentioned as well, diversification across some lenders. So, I hope that helps.
