Diversifying your property investment portfolio is a great way to minimise risk and establish a good balance of cash flow and capital growth during market fluctuations. Australia is not one market, and different locations and property types will perform differently during property cycles.
Here we discuss three common ways you can diversify your property investment portfolio.
1. Choose different locations
You would’ve heard the expression “don’t put all your eggs into one basket”. The same applies to growing your portfolio. Don’t just buy in one region or city because you know it well or would like to live there. Investing in different cities or regions minimises your risk in case there is a slowdown in rental return or capital growth due to market conditions. One location might perform better than another during the same phase of the property cycle, so you need a good balance to spread the risk across the portfolio.
When researching where to invest, the key is to analyse the growth potential of the region and the suburb based on the population growth, employment and infrastructure investment. Pay close attention to rental vacancy rates, comparable sales and price growth of the suburb to determine how easy it will be to keep your property rented and maximise returns or capital growth over time.
Buy in an area and property with features that appeal to tenants and owner-occupiers. Avoid buying in areas with increased competition, like big unit blocks or large-scale housing developments where you might find more investor-owned properties.
2. Mix up the property types
Another way to minimise your risk is to get a mix of houses, townhouses and units in your portfolio. Unit and housing markets perform differently across locations and during the property cycle.
Let’s use the Brisbane market as an example. The gap between house and unit prices is expected to shrink over the next 12 months as housing affordability bites, and buyers choose cheaper options. Units in inner city Brisbane are proving to be a viable investment option due to low supply and increasing rental returns. EKR Property has recently settled on a unit in South Brisbane on behalf of a Sydney-based investor achieving a gross rental yield of 5.07 per cent. The tenant was secured before settlement, thanks to the tight rental market.
3. Balance of cash flow and capital growth
The right investment strategy for you will be the one that takes into account your goals, personal circumstances and risk profile. To minimise your risk, ideally, you want a property portfolio with a good balance of cash flow and capital growth.
Buying for capital growth is more of a medium to long-term strategy where it is recommended to purchase and hold to take advantage of the capital growth over time. Ideally, you will have to buy in a suburb where the house values will likely keep appreciating. The downside of this strategy is that a property in a high capital growth suburb generally has a lower rental return, which is likely to be negatively geared as the expenses and loan repayments exceed the rental income. In this case, having a positively geared property in your portfolio is good to balance out your returns. It will provide you with more rental income and much-needed cash flow to cover the loan repayments and expenses of owning the properties.
EKR Property is a Brisbane-based Property Investment Advisory and Buyer's Agency focused on building investors' wealth and financial independence through purchasing properties Australia-wide.
The Founder and Director Edward Kinloch Reavy has successfully assisted hundreds of clients across Australia to buy land, build on that land, and secure existing homes, townhouses, dual occupancy properties, apartments and small-scale development sites.
For more information on how we can assist you in sourcing, negotiating and securing an investment property, email us at email@example.com.