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A key decision investors face when they are growing a portfolio is whether or not they diversify into different locations.
There are many different reasons why an investor might focus on a single area or purchase in different locations. Aside from the investment thinking behind the decision to diversify or not, there are also financing implications that you should consider.
Having a well-diversified portfolio means that your assets will likely grow at different paces at different times. Good finance structures allow you to borrow against individual assets, rather than your total portfolio position.
This means a well-diversified property portfolio can provide a more consistent source of equity growth in your portfolio, making it easier to release equity over time and helping investors grow their portfolios during slow markets.
The key to this is ensuring that your loans are not cross-collateralised, a common financing problem for investors. A cross-collateralised loan is a loan secured against more than one property.
Having each loan only secured against one property means your properties are separated in financing terms. This allows you to release equity from one property if it has grown in value, regardless of how the rest of your portfolio is performing.
A case, for example, of diversification below can help you release equity:
In John’s case, he finds that prices in his area have dropped 5 per cent. He goes to his broker who runs valuations and finds he has no equity to withdraw. As such, he cannot continue to grow his portfolio in the current market conditions.
Meanwhile, Sarah also finds her portfolio has also dropped by 5 per cent overall. However, Sarah’s broker finds that six of her seven properties have fallen in value, but one in Tasmania has performed strongly. This property has grown $100,000 in value and has $80,000 of available equity in it.
While their overall asset position is the same, Sarah can release $80,000 and use that as her deposit for the next purchase.
Why is this possible?
What do you need to do to take advantage of this situation?