How Much Diversification Is Sensible?

How Much Diversification Is Sensible?

This is an excerpt from Chapter Two, ‘How Much Diversification Is Sensible?’ of Frazer’s upcoming book, ‘The Alternative Guide To Property Investment‘. You can register your interest in pre-ordering the book by clicking on the button at the bottom of this post.

In the previous chapter, I mentioned that I go against traditional wisdom as I am not particularly convinced about diversification across different asset classes as one cannot possibly be knowledgeable about all of them and therefore must seek to rely on third-party advisers. If you have no time or inclination to look after your own money this is probably sage advice.

I accept that for most people there are good reasons to do so but, for me, I would point to the fact that one of the wealthiest people I have ever met invests all his money in property. But not just in any property, and not just in one particular area, but in one particular street (in central London). He won’t even consider buying properties on adjoining streets. As far as he is concerned, they are outside his area of expertise. Clearly, specialisation can have its advantages.

Therefore, I am not giving advice, just telling you what I personally think. The consensus of opinion about diversification may be generally sensible for most people but may not be right for everyone, especially for those who are experts in their field. That’s a matter for you to decide.

What I do think is sensible for most people is to diversify and spread your risk (within reason) so all your eggs are not in one basket.

And one reason I believe property crowdfunding is such a beneficial concept is that it allows you to spread whatever available capital you have over a number of different properties so, if a disaster befalls one, you don’t have all your money tied up in it and you still have others to fall back on.

Within the asset class ‘property’ itself, you could, if you wish, diversify your portfolio in a number of different ways. It could include traditional buy-to-let properties, new-build apartments, commercial investments, HMOs (houses in multiple occupation) and ‘fixer-uppers’.

Secured lending and development finance are other options that fall within the property investment umbrella, as you lend out sums to property developers and business owners who own property they can use as security.

Diversification also means a selection of risk profiles. Of course, you should take into account your personal circumstances and lifestyle requirements, as well as your own attitude to risk. Typically, higher risk investments come with the prospect of higher rewards, whilst a safer investment may yield lesser gains.

Buy-to-let has been the most popular option for property investment. Private renting has almost doubled in the period from 2003 to 2015, and in Manchester, it has almost quadrupled, from 6% to 20%.

This means, in theory, that the buy-to-let sector should offer great potential for investment over the coming years. However, as we shall learn later, the traditional way of purchasing single buy-to-let properties may no longer be the best way to capitalise upon this growing market. In fact, it may not be feasible at all for most individuals anymore.

The commercial property market, too, can be a good option.

Investing in commercial real estate can mean:

  • positive leverage (potentially increasing ROI (return on investment);
  • tax benefits (proper structuring can offer an array of benefits tied to interest, depreciation and so on);
  • more control (personal ownership equals control);
  • a hedge against inflation (such property tends to benefit long term from inflation);
  • cash flow and current income (rental income from stable commercial real estate means a potentially steady and predictable income stream);
  • historically strong returns (average annual return: 9.5% sustained over a 20-year period).

You can find out more about commercial property and how it compares with residential property investment later in this book.


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