On property portfolio diversification: How should you do it?

In the business of creating wealth through property, there are different ways to put your assets in “different baskets”. Diversification can be based on the type of properties in one’s portfolio as well as the location in which these assets are located.

“You've got residential property, you've got commercial property, you've got industrial property, you've got development property, you've got special properties … Your diversification [can also] be based on different states,” Munzurul said.

Location, in particular, is an important factor to consider in property investment because markets across Australia don’t always move in unison.

The accountant explained: “In New South Wales, one probably argues right now at this stage, is ... getting rather expensive. Then one looks into Queensland, and one [might] say, ‘The rental return is still about 5, 5.5, 6 per cent, depending on where you purchase … ’ or in Victoria … where you're considering [around] 4-4.5 per cent, perhaps.”

While property markets are unpredictable, a simple review of historical and economic data can show an investor the growth potential of properties in a certain area. After all, as the saying goes, “History has a habit of repeating itself”.

Some of the fundamental investment factors that one needs to consider when choosing a location to invest in are infrastructures, population growth, and jobs, which could often indicate how an asset will grow in the area over a period of time.

 Why diversify?

Many successful property investors are definite proof that diversification can prolong the life of a portfolio as it spreads risks and opens more opportunities for wealth creation. It also helps in striking a healthy balance between cash flow and capital growth.

Munzurul shared: “Some investors … they've got a whole bunch of residential properties … and they say, ‘While the growth is fantastic, I don't really have as much cash flow.' [So] they moved into a little bit of Commercial properties on the side … [which has] quite a strong level of rental return.”

At the end of the day, it is essential to be able to manage one’s risks well, and diversification is one of the most effective ways to establish a buffer and mitigate financial challenges along the way. While there is no one foolproof way to diversify a property portfolio, the key to perfecting this strategy is understanding one’s position as a property investor and determining the path he wishes to go from there.

“Diversification is absolutely essential … [and it has] to have a logic as well. The logic is, yes, as long as I understand those asset class, as long as the other asset class falls into my wider goals [or] my own personal objective, then that could be [the right way],” Munzurul concluded.

Tune in to Munzurul Khan’s episode on The Smart Property Investment Show to know more about the right time to invest into other asset clouds, as well as the risks associated with having two names on a mortgage and title and which one is preferable to new home buyers.