Diversifying your property portfolio is an excellent idea and a great way to reduce risk.
If you’re thinking about diversifying your property portfolio, here’s a brief rundown of what you need to know. In this article, we’ll focus on the buy-to-let market and touch on:
- Why it’s important to diversify your portfolio
- Analysing supply and demand
- How to diversify your property portfolio
- How to weigh up the risks and potential
- How to build a property portfolio
Why it’s important to diversify your portfolio
As with stocks and shares, it’s smart to diversify your investments in property. Diversifying means reducing your risk by investing into different property types, locations and by targeting various demographics. Diversifying may allow you to grow wealth safely and help you to create a reliable income that can withstand market changes.
Analysing supply and demand
An important first step for any property investor is looking into the supply and demand of the rental market. How big is the need for rental property right now? Could this increase in future? And what type of properties are renters currently looking for? Apply these questions not only to the area you are actively considering, but look at the wider picture as alternative locations may be better for you. These are some example questions you might consider when building your property portfolio. To help ensure that you have a clear understanding of supply and demand,
chat to a local lettings agent, who will be able to inform and guide you on your search.
Researching and understanding the market is pivotal to making informed decisions when investing in property.
How to diversify your property portfolio based on location, demographic and property type
You’ll find that there are several different ways to diversify your property portfolio, below are three options you may want to consider.
Location
One of the easiest and simplest ways to diversify your portfolio is by investing in different locations to the ones you’re used to or are comfortable with. Often the temptation for landlords is to ‘stick with what you know’ and although this is sensible in some cases, you could be missing out on opportunities to better protect your wealth and maximise profit.
Local economies can be delicate and in a worst-case scenario, the closing down of a major employer in the region can have a knock-on effect that could leave you vulnerable. If your tenants and prospective tenants find themselves without income all at once, it could spell disaster. The best form of protection is to spread your investments across various locations to minimise this type of risk. If you’re unsure where the best place to buy a new property is, seek the expert advice of a local agent.
Demographic
Another way to protect your portfolio is to purchase properties that can cater to different markets. For many landlords, the temptation may be to buy a row of terraced houses or a number of apartments in the same building – the appeal being that it cuts down on potential administration issues.
A more astute approach is to consider the different types of people that you could potentially let to (families, students, professionals, retirees), varying the demographics of your tenant base.
Consider the different types of homes in the marketplace and what they can offer your tenants; the concerns of families will not be the same as students. Young professionals may be drawn to an area with a fast broadband connection, whereas retirees may show preference to communal spaces where they can meet with friends and family. By varying your offerings and attracting different types of people, your portfolio may be better protected.
Property type
Similar to diversifying based on demographic, choosing different property types can help you spread any investment risk. You may find that when you diversify by property type, you automatically also diversify by the renter’s demographic.
When choosing different property types, don’t just consider the building itself, e.g. a flat versus a semi-detached or detached house, also consider the property’s amenities. For example, does it have a garden, a parking space or is a gym in the same building? All of these are factors that can help you ensure you attract a variety of potential tenants and help you further diversify your investment.
