Whether you’re working toward early retirement, your children’s higher education, a rainy day fund, or simply a healthy nest egg, property investing can help you reach your goals. Building a “smart” investment property portfolio requires a strategy, and taking the time to create that strategy can greatly affect your success down the road.
What does it take to create a “smart” investment property portfolio?
When we talk about investments in stocks and bonds, we talk about diversifying. It’s risky to put all of your money in one stock, but if you spread your money among many stocks and mutual funds spread over different industries and different countries, you’re in a better position to weather financial storms that may come.
Your investment property portfolio is no different – it benefits from diversity. In this post we’re going to talk about how you can diversify your investment property portfolio for maximum advantage.
Diversity of Types
It’s not uncommon for investors to feel most comfortable with a certain type of property. Some investors like to focus on single family homes, others prefer land or apartments, and others like to work with commercial real estate.
Although investing in a new type of property might feel uncomfortable at first, you’ll soon learn the basics of your new investment and have a diversified property portfolio. The skills you learned with your “favourite” type of property investment will easily transfer to the skills you need with your new type of investment.
For example, if you already have a single family home that you use as an investment, you already have many of the skills you would need to invest in an apartment unit or even a whole apartment building. You already know about tenant contracts, maintenance, marketing, and insurance. You simply need to learn a few new skills, and you’ll have a wider range of both skills and investments.
The benefit of investing in different types of properties is that market conditions affect property types differently, based on the local economy, population changes, and even regulatory changes. Apartments may be in high demand during certain time periods, but if you only have single family homes, you’ll miss out on opportunities.
Diversity of Location
When you invest in property in just one location, you subject yourself more to the fluctuations of that local market. For example, let’s say you have three investment properties in Melbourne. If you need to sell a property during a period of time that happens to be a downturn in Melbourne, you may need to sell a property for less than you’d like. If your three properties were located in three different cities, however, you could choose to sell the property in the location whose market is currently the best for sellers.
Some investors like to avoid diversifying by location because they have to then rely on property management companies to help them out. They like the control of being near their properties so they can oversee them and keep a close eye on them. They also may not want to spend the money on a property manager. These are understandable concerns, but try to weigh the pros and cons.
When a property isn’t right in your backyard, you gain a measure of freedom (you’re not the one who has to respond to maintenance issues). And the fees you pay to property management may be well worth it
Diverse locations in your investment portfolio can also help with the demand to supply ratio (DSR). The demand to supply ratio provides an easy way to identify the country’s hottest suburbs. It measures the gap in supply and demand for properties in a given area.
Property owners love to have properties in areas that are low in supply and high in demand, but these factors change frequently. You could buy a property in a high demand area and find that within a few years, the area is not so in-demand as it used to be. By purchasing properties in several different areas, you’ll be more likely to enjoy the benefits of high DSR conditions.
Your “Smart” Investment Property Portfolio
How do you go about creating your own “smart” investment property portfolio? Begin with an end goal in mind, and set about achieving that goal. Consider ways you can diversify your portfolio over time, and remember to diversify both in type of property and location.
For more information about property investing, or to talk about any other personal finance concern, get in touch with us at Full Financial Services. We look forward to talking with you.