Diversifying Your Property Portfolio

Investing in any asset class is never guaranteed, there is always risk of losing as much as you put in. Residential property is no different. Just as there is potential for growth, there is potential for stagnation or decline in market value.

                A good way to reduce these risks is to diversify your property portfolio. There are two ways to do this. First, buy properties in different locations. Maybe you might have one in a city, the other in the suburbs, and another in a different state.

                When you have all your investments in the same location, your exposure to risk is too large. If the market changes for the worse all your investments will be hurting. It’s kind of like putting all your eggs in one basket.

                Let’s say you buy all your properties still in the same location and in ten or twelve years the area loses its popularity for whatever reason(s). The decrease in demand very well could affect the resale value of your property. If your properties could be playing host to a new express way which will create constant noise. This almost certainly will decrease the value of your asset.

When you change the locations of your investments you can minimize the risk if your total investments. If one property falls in value a bit, not everything is lost. The others in different markets will hold their own and it won’t hurt as bad.

The second strategy is to buy across different price ranges. The benefit in this is flexibility. You will be quite flexible when you have to sell your properties to free up equity, like when you retire and want to add some heavy cash to your super fund.

Let’s now say you have $1 million to spend on investments. You can either buy one asset for the entire amount, or two assets, one worth $650,000 and the other for $350,000. If you go with the two assets you only need to sell one to free up some cash which allows you to keep the other and continue the growth of your equity.

This will also help with your tax burden. If you bought the $1 million property and sold it, the capital gains tax would surely put a dent in your wallet. If you bought the two, you could sell them in different financial years to spread your capital gains tax liability over two years.

Since real houses are usually more expensive than apartments and condos, buying across different price ranges means buying some of everything. I am not saying to compromise on the quality of your investments, but to simply buy different ones. Residential properties are much more important to be quality than quantity.

Chances in the environment, demographics, and infrastructure are out of your control, but to diversify your investments is not. This will allow you to minimize the risk associated with these factors, leaving the tidal wave turned into a mere rain storm.

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