23 December 2019 Minimise risk, maximise yield: why diversification works

Australians have an obsession with property. Whether saving to purchase a first home or building a portfolio of investment properties, buying real estate remains, for many, the great Australian dream.

But one of the best ways to mitigate your risk exposure when investing in property is to practise investment diversification. For instance, you could buy property in different parts of the country – a strategy many savvy property investors use as they ride out the ups and downs of the market.

Diversifying a property portfolio can also lead to higher yields and the preservation and growth of your investment capital.

Diversification can never guarantee protection against market fluctuations. But it will mean property investors will be less exposed to a single economic event. It can also lead to the ability to generate consistent income into retirement.

Of course, investors can never completely eliminate risk when investing. However, there are a number of things you can do to help mitigate risk, says Brendan Clark, a buyers’ agent who works exclusively with investors.

Clark, from The Property Curator, says a deliberate decision to diversify investments can help property investors bolster cashflow generated from properties in their portfolio.

‘The diversification comes from getting property exposure to property markets that have different underlying growth cycles and economic drivers,’ explains Clark.

‘This strategy has allowed me to enhance the cashflow of my portfolio, particularly with exposure to a couple of properties in a major regional centre that has always had very strong yields,’ he says.

Clark always buys properties with greater owner-occupier demand. And he isn’t keen to buy in just one location, so he owns property in Sydney, Newcastle and Adelaide.

‘I also always ensure I’m buying properties that are typical for the area, such as a three-bedroom freestanding house with a garage,’ says Clark. ‘This helps ensure I’ll have a ready supply of potential purchasers should I need to sell in the future.’

Another important risk-mitigation factor is to always have access to a healthy buffer in the bank if things don’t perform as expected.

‘Finally, I adopt a standardised approach to due diligence on potential properties and I never take shortcuts,’ he says. ‘Upfront work on research and due diligence can help avoid property nightmares down the track.’

Jay Anderson is another property expert who advocates the importance of diversification within a property portfolio.

The Sydney-based property strategist and buyers’ agent says it’s a concept investors soon learn during a market correction or market stagnation.

‘Diversifying not only enables you to take advantage of different market cycles, it helps reduce risk and balance out the portfolio to become a healthier and more stable investment,’ says Anderson.

He nominates four things investors need to consider when it comes to diversification:

Number of properties: Spreading your investment across multiple lower-dollar value properties is a great way to reduce your risk when it comes to portfolio-vacancy and cashflow risk.

Location, location, location: Diversifying geographically reduces over-exposure to a single market, a problem which can impact your portfolio substantially during a market correction.

Investment types: Introducing into a portfolio different property investment types, such as commercial property, is a great way to balance and diversify.

Purchase strategy: Capital growth, cashflow, renovate-for-profit and small-scale developments are just some of the different purchase strategies investors can choose within a portfolio. Looking at implementing different property strategies in different markets can be a great way to diversify and build a well-balanced portfolio.

Anderson says investors should also look outside the box to ensure they have diversified adequately within their property portfolio, and consider seeking expert financial advice.

Attention: Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, i.e. rent, restoration and market fluctuations. Prospective investors should seek independent advice. See dha.gov.au/lookforward for relevant information.

Attention: Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, i.e. rent, restoration and market fluctuations. Prospective investors should seek independent advice. See dha.gov.au/lookforward for relevant information.

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