The Power of Diversification

  • The Power of Diversification

Diversification is one of the most important words for any investor. It’s important to spread risk and reward across assets so that you don’t get bankrupted if one investment goes bad. And when it comes to investing in property, diversification can bring you many other benefits on top that result in greater wealth accumulation and more cash flowing in.

Spreading risk

 This is one of the more obvious reasons. If there is a market downturn or something else goes wrong and you have the one expensive property, your entire portfolio is then exposed to that risk and you may actually lose a chunk of money if you need to sell.
Alternatively, you can spread five cheaper properties around separate markets and minimize your risk exposure. If one has to be sold, only 20% of your portfolio is vulnerable and any losses are likely to be minor. Say a $200,000 property fell 20% in value, you could lose $40,000, while the same percentage fall on a $1 million property would see you lose $200,000.

Greater growth potential

Say you had $1 million to invest and were weighing up whether to buy one $1 million property, or five properties worth $200,000 each. A lot of people have the old mentality that it’s better to be paying off one single property than having debt on several at once. But when you think about it, a $200,000 property has more room for upside. It is most likely in a fringe location that will experience growth as affordability constraints push buyers out of more expensive price brackets. It is a much smaller leap for that property to double in value to $400,000 than it is for a $1 million property to appreciate being worth $2 million.

So, if you have 5 of the $200,000 properties, you are likely to double your money to $2 million much faster.

The added bonus is you can purchase smaller properties one at a time and use their growth as leverage to invest in the next one. If you play your cards right, you may only need to save one small deposit, before using equity growth as a deposit for property number 2, and then rinsing and repeating from there.

Multiple rental income streams

Multiple properties equal multiple income streams, which is very important for cashflow and borrowing power. If you suffer a vacancy period with one of your properties, it’s only 20% of your cashflow that’s affected and there’s still a good chance your portfolio is positively geared.

Why? Because properties at the affordable end of the market have more competition between tenants and the rent is therefore proportionately higher than in other market brackets.

The $200,000 properties are likely to command upwards of $300 a week in rent and therefore will be positively geared. Five of those would give you $1500 a week in rental income. And that is a very conservative rental estimate in the current market, where such properties are routinely fetching more than $400 a week.

Rental returns on higher end properties are usually much lower because there isn’t much demand for those from tenants.
All up you’d be earning hundreds of dollars a week more in rent with five cheaper properties than what you would earn from the same outlay with a single $1 million property.

And if you had one property, and it suffered a vacancy period, that would be 100% of your cashflow affected and would put you in a position where you’d need to use a lot of your own money to service the repayments.

Positive gearing advantages

The best thing about having a positively geared portfolio is that you aren’t putting yourself under pressure by having to come up with extra money to put into your investment each month.

To positively gear successfully, most investors will start out paying interest only on a property loan, until over a period of a few years the rent rises enough that they can begin paying down the principal and still staying in the black. Affordable properties are more likely to allow you to do this, which will stop you having to sell assets in order to deal with financial hurdles. Eventually, you still wind up in a place where your portfolio pays itself off and you can then enjoy a passive income stream. If you need help figuring out the strategy you should follow or require more information, feel free to reach out to the Investor Relations team at B.Invested.



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