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Diversification is key to reducing the risk to your property investments. We look at what it takes to create a diverse property portfolio.

Investing in anything poses risks, and property is no different: it’s a fluid, long-term asset. Just as financial experts recommend a diverse investment portfolio as a way to reduce risk and increase gain, the same can be said for your property portfolio. Diversifying your property portfolio lessens the risk of investing in property and provides some additional benefits to boot.

Keeping it interesting

To put it simply, diversifying your property portfolio avoids that old pitfall of putting all of your eggs in one very expensive basket. You can diversify in several ways. One is to consider location: if you put all of your money into one suburb and then that suburb undergoes a major infrastructure change – for example, the airport flight path changes and planes are suddenly and regularly flying over your property or [insert any other worst-case scenario here] – you’re in a wee bit of an investment pickle. If you spread your investments over various locations, though, you’re also spreading out the risk, thereby lessening any potential negative impact.

Also look at buying at different prices. This is particularly relevant when you want to free up equity but still maintain a strong asset in your portfolio. For example, let’s say you have $900,000 to burn on property. If you purchase a property for $600,000 and another for $300,000, you’ll be able to sell the $300,000 property and free up the equity if required (or desired) while the other property keeps accruing income. Once again, you’ve dispersed your risk and opened yourself up to a win-win scenario.

Buying at different price points also generally means buying into different property types, as, generally, an apartment or townhouse costs less than a house. Another perk of this approach is that each property type appeals to a different demographic.

You can also look at spreading your investments across commercial as well as residential properties. There are significant differences. For example:

• Commercial leases are usually longer than residential ones
• GST applies to commercial properties
• Commercial properties have higher yields than residential homes
• With commercial properties, the tenant usually pays the maintenance costs.

With these differences in mind, do remember that you need some level of expertise when investing in commercial properties.

Finally, don’t forget the golden oldie when trying to diversify – quality over quantity. If you have $900,000 to spend, don’t buy four cheap properties; instead, select fewer, good-quality properties.

High maintenance

Yes, diversifying your property portfolio is naturally more complicated than throwing your money into one venture, so you may want to employ a property investment manager to help you along.

Diversification heavily reduces risk and allows you to free up money as necessary. (If you’re considering your retirement, it’s particularly pertinent.) Also, investing across a number of properties means that you won’t get slapped with one large sum in capital gains tax; instead, it will come in smaller doses and offer you a more manageable time frame.