The importance of diversifying your property investments

An investment portfolio is a bit like a wardrobe, you may have a preference for a particular type of clothing, but generally you need several different types of clothing in it to ensure that you are always prepared for any situation. Property is generally, and understandably, often considered to be one investment class, which it is, but it’s a very broad class and so you can diversify within it, in fact, it’s often a very good idea to do so. Here are three reasons why.

Diversification is all about spreading risk

Ultimately diversification is just an expression of the phrase “don’t put all your eggs in one basket”. Some people qualify this by saying “unless it’s a really, really good basket”. While this may be true in principle, many investors feel more comfortable if they have at least some level of diversification in their investments and it is often considered a sensible strategy to look for investments which either perform well in all economic climates or for pairs of investments where the conditions in which one investment is more likely to perform poorly are the conditions in which the other investment is likely to perform well. When investing in residential buy-to-let properties for sale, diversification can also help to minimize the impact of voids and/or problem tenants and you don’t necessarily need to buy multiple properties to make use of the principle of diversification, for example you could choose to let a property as an HMO rather than as a single let, so that if one tenant defaults, you still have the income from the others.

You can get exposure to different property markets

There’s more to property investment than residential buy-to-let although if you do want to specialize in this, you could diversify by investing into different geographical areas and/or different renter demographics. There’s also commercial property (which has some very exciting opportunities right now as there is a huge demand for both student property and care home investment). There’s also the option to invest in property indirectly, for example, through buying shares in property developers or the bonds they issue. You might even want to look at short-term rentals (such as holiday lets and serviced lets to business people) or overseas investments. These might not be what you’d choose as your core investments but could be profitable niches.

It allows for more flexibility

For most people, life is a state of constant change. Some changes may be planned; many will probably come as a surprise. Having a diverse range of property investments can make it easier for you to adapt to changing circumstances, since it is usually easier to sell multiple lower-priced properties than one higher-priced property. Even if you see yourself as being in property investment for the long haul, it is usually advisable to define criteria you can use to determine whether or not the property market is still the right place for you to be. If it isn’t, then you’ll want to make an orderly exit. If it is, then you’ll want to remain alert to the best opportunities and you may find it useful to be able to sell part of your existing portfolio in order to finance a better opportunity.

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