Property Diversification: The Benefits and The Strategies

Friday, August, 2019

Building a profitable property portfolios is about minimizing financial risk. Diversification of course, plays a huge role in this matter. This diversification strategy involves spreading your risk across different property investments to increase the odds of investment success. Diversified portfolios can generate more money, protect your wealth and offer long-term returns.

Although diversification won’t bring guarantees, it manages risks by investing in a mix of property types for more consistent profits. Here is how you diversify your portfolio:

Don’t put all your eggs in one basket.
No doubt you’ve heard about this before, right? It basically means don’t invest all of your money in the same area, or even the same city. Why? Because you open yourself up to the possibility of losing everything at once. But with diversification, you can reduce that risk. Instead of investing in one area, create contrast with a geographically diverse portfolio.  Investing in other states creates a larger pool of opportunities. Likewise, investing in a mix of residential and commercial properties and different priced-properties adds diversity. A strategic spread of properties spreads your wealth, leaving it less susceptible to volatile markets and investment fluctuations.

Although risks can’t be entirely eliminated, they can be managed to minimise potential losses against your investment portfolio. Diversification reduces risks by ensuring you’re not left over-exposed in fluctuating markets. To achieve diversity, allocate investments into different asset classes of various sizes, industries and locations.

Diversification generate returns
When you diversify your portfolio, positive returns are achieved in one market or location while the other market/area is at a loss. These market ups and downs are inevitable. To avoid the worst of them, a good diversification strategy is valuable when properties don’t perform well. The more contrast you create in your portfolio, there more likely there are other properties that’ll perform better to cushion the blow from investments that are struggling.

Rentvesting is a smart strategy that adds variety to your property portfolio. It also comes with a number of benefits. If you invest in multiple properties profitability increases. As rental prices rise, so does your income whilst major expenses, such as mortgage payments, stay relatively the same apart from some minor fluctuating interest rates. A strategy for more properties creates diversify in portfolios – which leads to more passive income for you.

Mix it up with residential and commercial
Including a mix of both residential and commercial property can be a great way to diversify your portfolio. For some investors, commercial real estate is a rewarding opportunity to add diversity and increase financial wealth. Done right and it puts you ahead of competitors who find commercial too complicated or outside their comfort zones. Just make sure that you have done your research before investing in any commercial properties.

Other Benefits of Diversification:
  • Take advantage of different market cycles
  • Lower risk by investing in different vehicles
  • Achieve financial freedom through owning many properties, which creates multiple income opportunities
  • Better access to more equity
  • Spreads wealth to build a healthier portfolio
So are you ready to diverse your property portfolio? Talk to us about your investment plan in Australia, and we might just be able to help you make the most of your money.

What You Need to Know About Property Cycles in Australia

Thursday, August, 2019

So what is property cycle? A property cycle is a sequence of recurrent events reflected in demographic, economic and emotional factors that affect supply and demand for property subsequently influencing the property market.

A simplistic version of the cycle looks like this: As our population grows, there is an increased demand for real estate – both rental properties from investors and new homes from owner-occupiers. Slowly, this causes property values to increase because of the forces of supply and demand. At the same time, builders and developers hop on board and start constructing new dwellings to meet this increased demand. However, the pendulum tends to swing too far and over time we usually end up with an oversupply of dwellings. This oversupply eventually results in slumping home values and rent reductions.

There are four key phases of a property cycle. Let’s take a look at them one by one.

The Boom Phase
This tends to be the shortest phase of the cycle. During the boom stage, real estate prices increase rapidly – often by more than 20% each year. Each boom brings a whole new generation of investors into the market and at the same time, homeowners push up demand for houses. Together this leads to increasing property prices. Builders and developers then flood the market with new properties to meet the increasing demand.

The Downturn Phase
Booms are generally eventually followed by a downturn or slump phase that is often characterised by an oversupply of properties due to the over-exuberant activity of builders and developers during the preceding boom. This can result in increased vacancy rates and decreasing rental prices. Property prices tend to stop growing and sometimes drop by around 10% or so in this phase. 

The downturn phase typically lasts a number of years, but prolonged booms are usually followed by a longer and deeper slump phase with a greater likelihood of prices falling further.

The Stabilisation Phase
Eventually, the market moves on. Falling interest rates and pent-up demand during the slump phase set the stage for the next property upturn. But prices don’t suddenly start escalating wildly. Buyers tentatively move back into the market, but as the number of buyers and sellers is in rough equilibrium, property prices remain flat or only move up slowly. This can be a time of great opportunity, yet it is not easily recognised by most investors.

The Upturn Phase
In time, the cycle moves on and eventually, we progress into the upturn phase when vacancy rates typically slowly fall, rents start to rise and property values begin to increase again. At this stage of the cycle (which could last three or four years) property is generally affordable, returns from property investments can be attractive and more home buyers and investors begin to enter the market. This is also when many builders and developers begin work on new projects, aiming to have them completed by the late upturn or boom phase of the cycle. At the end of the upturn phase, real estate prices will have risen substantially and property starts to become less affordable for many Australians. 

Then we start all over again.

A property cycle doesn’t necessarily last a fixed period of time. But looking back, property growth in Australia has peaked in the following years: 1981; 1987; 1994; 2003; 2010; 2017. And digging deeper into the stats, it is clear that over the past 40 years, well-located capital city properties have seen their values double every 10 years or so (growing at around 7% per year on average, according to the Real Estate Institute of Australia.)

But one thing you need to know about Australia’s property cycle. Each state can be at a different stage of its own property cycle. Even within each state, the markets in different areas are segmented by geography, price points and type of property.