While buying your first property is the most daunting experience in your portfolio-building journey, getting the next one comes to a close second.
You are now settled with your first property with a tenant and a property manager, so what is the next move?
Remember, one of the golden rules in investing is making sure you don’t put all your eggs in one basket. And the sound reasoning behind this is that when one basket suffers from a loss, the whole portfolio doesn’t experience that loss. You can still use the earnings and the good performance of other investments to offset the losses from one property.
Different investments have different risk levels and therefore offer different rewards, too. By making sure that you have at least one egg in each basket, you open the doors to multiple possibilities.
When it comes to property, how do you ensure diversification? And how do you get the proper mix? Can you diversify by location? Or by property type? Or maybe according to capital growth and rental return? Let’s break all of this down.
Diversification by location
Your first property may be in the same city you live in. And you might be tempted to buy the second one in the same property market. While there is nothing wrong with that, you can gear towards diversification as early as your second property. Look into either city with high growth potential.
Sometimes, it’s wiser to invest in the suburbs than in the major cities where there is great demand but also an oversupply of houses. This is why it can’t be stressed enough that you have to do your research first.
By investing in multiple locations, you also protect your portfolio from location-specific losses. A natural catastrophe like flooding in one city may drive away renters from a location. If all your rentals are in this same city, what is left for you to get income from?
Look at the trends in the past year. Did the property market grow in cities like Melbourne and Sydney as much as in the less popular markets?
Are there future developments that may affect the demand for housing in areas far from the cosmopolitan? Foresight is an asset you can benefit from, but it has to be guided by reliable data.
Diversification by asset class
A good strategy to look into is getting properties across the asset class spectrum. Expect that in times of economic boom, people will likely live in big, luxurious apartments in major cities.
In times of recession, the desire for such premium properties may dwindle along with financial capacities. Having low- to mid-priced properties is a must, too.
Diversification by asset type
The beauty in real estate is that it’s not hard to diversify. Just looking at asset types, you have many to shoes from.
If you start with a rental unit in an apartment complex, you may opt for a single-family home for your next investment. Residential is not the only choice. You can also invest in commercial spaces, office buildings, and even storage units.
All of these properties have different income potentials that you can explore to barring your portfolio to a balance. Some of them may not bring you high monthly income but are great for capital appreciation over time. This is also something you might want to consider in building your portfolio.
When you decide if a property is a no or a go, you have to keep in mind your risk appetite. It’s best to settle with stable assets that can generate positive cash flow first before diving into riskier markets.