How Do I Diversify My Property Portfolio?
A diverse property portfolio is the absolute gold standard when it comes to a successful investment strategy. Cherry picking a healthy mix of investment types across the board, and taking into account your lifestyle requirements and risk profile, is key. You should also put in the time and effort to compare and contrast which investments are likely to generate the highest returns.
That’s just for starters. Let’s go into a bit more depth about what you need to know in order to create a fully diverse portfolio of property investments.
Why Should I Create A Diverse Property Portfolio?
It’s principally about not putting all your eggs in one basket. With diversity across your entire portfolio, you bolster yourself against any problems should anything come up to scupper any one investment in the portfolio.
What Criteria Should I Be Looking For?
Well, this is a subjective thing. In short, it depends what you’re looking for. There’s an array of factors to consider in order to nail down what exactly is going to be the right investment for you.
These include (but are not limited to) questions such as:
- Are you looking for a short or long term investment?
- Are you likely to need your money back quickly (i.e. how much liquidity do you need?)
- Are you looking for income or capital growth?
What Options Are Available?
Again, depending on your criteria, you might consider:
- The slow and steady traditional buy-to-let model
- The fixed revenue of student developments (ensure that you’re able to exit easily, though!)
- HMO (House of Multiple Occupancy) – a lucrative choice, but pretty management intensive
Alternatively, you could consider investing in:
- Development finance
- Hotel investments
- Secured lending
- Commercial property
Location, Location, Location
Another way to broaden the scope of your property portfolio is to diversify by location.
There is, however, a counterargument to this: whilst investing in property over several locations is a diverse-happy strategy, there’s a lot to be said for specialising in one or two particular areas. This is an option for those aiming to deepen their expertise in one area, and can also be argued to deliver better results.
That being said, when diversifying by location, here are some of the major factors to bear in mind:
- Promising Places
Look for towns and cities with projected increases in property prices. This can often be seen as a result of new employment opportunities being created by businesses opening or relocating to the area.
Tip: a term common in property investment circles is the “Waitrose” effect: price increases can sometimes be anticipated by the opening of a new Waitrose food market in the area.
- A Place In The Country
As the capacity for home working grows, more people are taking advantage of the chance to relocate to the countryside. Smaller villages in the outskirts of big cities, particularly those on good rail routes for commuters, are likely to grow in demand.
Both in the residential sales and rental markets, a key part of your research should definitely include knowing what is in high demand.
As the population of renters looks to overtake the number of homeowners, many investors are considering buy-to-let as a good option to add to their portfolio. Consider covering your bases with both buy-to-let and development projects for the sale market.
REITs and Crowdfunding
- What is a REIT?
REIT stands for Real Estate Investment Trust. It’s a company that owns and operates income-producing real estate.
- What is Crowdfunding?
Crowdfunded property investment involves coming together with a group of other investors, each putting in a sum towards purchasing a property.
What’s the Difference?
With models like property crowdfunding and peer-to-peer lending, there are fewer potential outgoings and a lot less hassle than when investing with a REIT. Nonetheless, by virtue of the crowdfunding model itself, sharing the investment with many other investors, you lose the control that you have with a REIT investment.
With REITs, however, there are typically lower rates of return to be expected. This is due to higher expenses, such as maintenance costs and fees. These kind of portfolios can be much more complex to manage. REIT investments are generally a better bet for a long term investment, typically spanning 10 to 20 years, whereas with property crowdfunding and P2P secured lending, you’re looking at a much shorter term investment, from as little as 3 months. Returns in crowdfunding and P2P for property are potentially significantly higher than REIT investments – up to 12% p.a. on some platforms.
Even if you don’t have huge sums to invest, both REITs and property crowdfunding are potentially good options, allowing you to create a diverse property portfolio more affordably.
If, however, you are leaning towards leaving your investment with the experts, rather than managing your portfolio yourself, you should still be sure to keep an eye on market conditions. Knowing when it’s time to review the ratio of your portfolio, and spotting signs that an investment could lose its profitability (meaning you should make a hasty exit!), is vital.
Spreading your capital over a variety of investment types is, inarguably, the most sensible course of action. REITs and property crowdfunding are both good options if you wish to add property to your investment portfolio, but don’t want the job of managing a property yourself, or wish to diversify as far as you can within your affordability. Whatever path you choose, don’t forget: diversity is vital.