Why is diversification so important in property investment?
Diversification: It's a word that anybody interested in property investment will be familiar with. It will have been drummed into you from your first forays into the art of real estate, but just why is it so important?
Let's take a look at what it means to have multiple properties, and why it helps to protect your capital.
Issues of risk
It doesn't matter if you're investing in shares, stocks, cash or business, every investment carries a risk with it. Otherwise it wouldn't really be making you money. Property is the same – though of course you can mitigate it with the right financial strategy.
By buying multiple properties, you are helping to spread that risk. Look at it this way: Property, on average, accrues value at about 10 per cent per annum. However, the important word there is "average". There's a reason why property mentors at Think Money urge diversification; it's so that even if you have one property that is lagging behind, you will have another one that is making up for it.
By buying multiple properties, you are helping to spread that risk.
Let's take an example: the average Brisbane apartment. According to CoreLogic RP Data, these are valued at around about $400,000. Let's say your investment portfolio consists of one single Brisbane apartment, and suddenly the bottom drops out of the suburb you bought it in. Suddenly, that property is now worth $390,000 – you've just lost $10,000, and might even be tempted to sell off that piece of real estate.
However, if you had two apartments, in different parts of the city, you might find that as one apartment value drops, the other apartment value grows. Even though you've lost value on the one, you've gained value on the other. Start stretching that same theory out into investing in different parts of Queensland, or even different types of property, and suddenly you'll realise the power of diversification.
It's like having a thumb in every pie. Every property will have its heyday at some point – and some will take longer than others. But by diversifying, you are ensuring that you are keeping the books balanced in the short term while you wait out for the long term.
Owning lots of investment property might seem daunting, but here at Think Money we can teach you how to make it as easy as possible – and your wallet will thank us for it! Get in touch with one of us today, or come along to one of our property investment education seminars to find out more.