Having a high-performing portfolio is a great way to achieve success as a property investor. Carefully choosing and managing properties can provide steady income in the form of rent, or they can be sold off later when you need to pay for a larger purchase such as sending a child to university or buying another property to expand your portfolio.
When building a portfolio, it can be tempting to choose properties of the same type or within one location, such as investing exclusively in rental units in a particular suburb. While this may make sense at first if that type of property is producing good ROI, this strategy can actually be risky. Let’s take a look at why, when done right, diversifying your portfolio is the smarter decision.
One reason why people like to invest in property is that properties tend to increase in value over time. That said, the property market is also constantly changing. For example, while things may be looking up for a few months in a certain location, there’s no guarantee that that will always be the case. Things such as demand and property values may change, directly impacting the performance of your portfolio,
Focusing solely on one type of property or location puts you at a greater risk of suffering significant losses if the market experiences a downturn. Think of this as a classic case of “putting all your eggs in one basket.” Diversification allows you to be prepared for market changes and still have a productive portfolio even if some of your properties are not doing particularly well.
Potential Tax Benefits
While many investors focus only on residential properties, there can be real benefits in adding commercial properties to your portfolio as well. For example, there are certain depreciation tax benefits that can be claimed when buildings are not used as residential property. Depreciation, such as wear and tear on the building and on assets within the building, can lower overall taxes on the property. This can help you balance out repair and renovation costs for your properties, which in turn can increase their value.
Protection Against Losses
Sometimes, despite all your research and preparation, the property you thought would be a big success barely makes a profit or, worse, is suddenly losing revenue. If you’ve diversified your portfolio properly, it’s likely that you’ll have other properties that are making money at the same time, thus providing you with a safety net against the losses.
Also, since you’re not really in a rush to gain back what you lost thanks to having properties that are still producing income, you’ll have more time to think and properly strategise how to move forward with the underperforming space.
But Be Careful
Diversifying your property portfolio is a good way to protect your investments and minimise risk. Some people however, in an effort to diversify, go ahead and invest in types of property they’re unfamiliar with. This can be a big mistake.
Commercial properties, apartments, single family dwellings, and other types of property all have different factors that determine their profitability. For example, commercial spaces may perform better if they are near city centres while residential properties may offer the biggest rewards when they are located near public transportation and public amenities. In other words, it’s not enough to have different kinds of properties, you should also know the factors and risks involved with each so you’ll be able to make the right decision in terms of choosing which properties should be part of your portfolio.
We’re Here to Help
As with other financial matters, diversifying your property portfolio entails extensive planning, research, and funding. And, it can be really challenging even for seasoned investors. If you need help with property investment or in making the right decision in other financial areas, we at Clever Finance Solutions are here to help. We make it our goal to secure a loan that best fits your needs, and our team has access to an extensive network of professionals who can help you in your property journey. Please get in touch with us today to know more about how we can help.