In his previous article, Frazer Fearnhead looked at traditional property investment v crowdfunding, and now examines the benefits of a diversified portfolio.
A diversified portfolio of investments is crucial if you are hoping to succeed as an investor. This is, of course, as much the case when investing in property as any other investment type. Putting all your eggs in one basket is never a sensible move, as you stand to lose badly should something unforeseen happen to that investment. By spreading your risk over a number of properties, you are in a better position should the worst happen.
Creating a property portfolio of investments across different types of property is central to diversification. Doing your research to establish which investments have the highest potential returns is an obvious part of the process. However, you’ll also need to take into account your personal circumstances: your lifestyle requirements, your risk profile, and your age.
What to look for
You should firstly assess your own particular criteria, which can be done by asking yourself a few simple questions:
Is it capital growth or income you’re looking for?
Would you prefer a short or long term investment?
How active a role do you wish to play in your investment?
Are you likely to want your money back quickly, and thus require liquidity?
This assessment shouldn’t be limited to these questions alone, however. Looking at your options from all angles and assessing your preferences thoroughly is of vital importance.
Ways to diversify with property
Once you have established your criteria, the next step is to assess the type of property investment that will meet those criteria. Are you after the slow and steady revenue of a buy-to-let investment? Or is a student development high on your radar? If student accommodation draws you, be sure to check that you can exit quickly if necessary. HMO accommodation is another popular investment type, and one that’s equally popular with young professional tenants. It’s good to note that HMOs can be quite a high maintenance investment, with a lot of management required. That being said, it’s also, potentially, a highly lucrative option.
Diversifying across both buy-to-let and development properties for sale is a good move. Renting is a particularly popular option for many at the moment, though demand for property to buy is also extremely high.
Alternatively, you could focus your attention on the commercial property market and hotel developments. Then there’s the option of secured lending and development finance.
You could also seek to diversify your portfolio by location, picking properties in a number of high yield areas. Alternatively, by focusing on one specific location, there is the option of specialising and growing your expertise in one area, which may bring you high (and, some may argue, better) returns.
Whether you specialise in one area or diversify across different locations, you should be sure to target towns and cities where the projected property price increases are attractive. For example, fresh employment opportunities are strongly implied in areas where new businesses are setting up.
You may also find lucrative investment opportunities in smaller villages just beyond the outskirts of the city. Rural properties are in high demand in areas which have easy access to commuter rail networks. Essentially, establishing what type of properties are in high demand, and where to find them, will be an important aspect to consider when choosing your investment properties.
Should I invest with a REIT or through crowdfunding?
Both Real Estate Investment Trusts (REITs) and property crowdfunding are passive investments, where no maintenance and management by the investor is required. These options are also good for those who have a smaller sum to invest. Whilst these are largely passive investments, you’ll still need to keep an eye on market conditions yourself, as well as when to review the ratio of your portfolio.
A REIT owns and operates income-producing real estate. These are typically better as long-term investments, usually between 10 and 20 years, and the returns are often less than to be expected with property crowdfunding. This is primarily due to the number of expenses involved with a REIT investment, as maintenance costs and portfolio management costs also need to be taken into account.
The investment term with crowdfunding and secured P2P lending, however, is generally much shorter, from as little as three months. What’s more, the returns are potentially higher, with some platforms offering up to 12% per annum.
It comes down to the level of control you want over your investment. With property crowdfunding and secured P2P lending, you are working in a group with fellow investors, so the investment isn’t entirely in your hands to control. However, the potential outgoings and hands-on management of the investment are significantly lower. Again, it pays to weigh up your options.
Your affordability and risk tolerance
As with all forms of investment, you should be careful to accurately assess your affordability. There’s always the possibility of the value of your investment falling, so you should be prepared for that. You should be sure that you will be able to survive without income from a property whilst still making the mortgage payments.
When you have a well-diversified property portfolio, there is much more of an opportunity to engage with properties of varying risk profiles. So long as you can afford it, of course.
To conclude, diversification of an investment portfolio is certainly the recommended course of action, and you should diversify as fully as your means will allow. As well as distributing your funds across several investments, where managing and maintaining a property is something you’d rather not deal with, property crowdfunding and REITs offer a promising solution.