Diversification, as any financial advisor will tell you, is the key to investment success.
A diverse investment portfolio, with a healthy mix across the board, taking into account factors such as your lifestyle requirements, age and risk profile; as well as comparing and contrasting which investments are likely to yield the highest returns, is central to a successful investment strategy.
Everyone has their preferred investment vehicle; for me, it’s property investment, as I strongly believe it’s the best options for investment within the UK when applying my own risk/ reward, yield/ capital growth criteria. With interest rates currently crawling far below 1% in cash savings, and financial uncertainty around the EU referendum result, there is no better time to consider adding property (or more property) to your portfolio.
As you should diversify across your entire portfolio, so it makes sense to diversify when it comes to your property investment; the idea being that you avoid putting all your eggs in one basket should something unforeseen happen to a particular investment.
What Should I Be Looking For?
The answer to that question lies in what your particular criteria are. Are you looking for income or capital growth? Long or short term? How hands on do you want to be? How liquid do you want your investments to be – are you likely to need your money back quickly? These and many other factors will determine what sort of investment is right for you
Depending on your criteria, you may wish to consider traditional buy-to-let (slow and steady), student developments with a fixed revenue (but make sure you are able to exit easily) and HMO accommodation which can be very lucrative though much more management intensive. Other alternatives include hotel investments, commercial property, development finance, secured lending. Each have their pros and cons.
Diversifying by location is another way to spread the scope of your property portfolio – though the counter argument that specialising in certain areas will give you greater expertise and better results can also be argued.
Target towns and cities that show promise in terms of projected property price increases, as a result of new businesses opening in the area that will generate new employment opportunities.
Then there are more rural properties in smaller villages on the outskirts of big cities, specifically ones on good rail routes for commuters. Knowing what’s in high demand, both in the rental and residential sales market, will form a key part of your research.
With an increasing number of people choosing to rent rather than buy property, covering your bases with both buy-to-let and developing properties for sale within your portfolio, is a good move, too.
Risk and Affordability
Whatever your personal risk tolerance, when you have a diversified property portfolio, you may be more prepared to invest in properties with varying risk profiles. It’s important, however, to take great care over your affordability.
As with all forms of investment, you need to be sure you aren’t going to financially ruin yourself should your investment value plummet, which is always a possibility. If you cannot survive a few months without income from your property whilst bearing the brunt of mortgage payments, you should probably put your money elsewhere.
Monitoring and Maintaining
It is possible to make property part of your portfolio and create a diverse portfolio without having tens of thousands of pounds to invest. Two ways you can easily do this are investing via a REIT or via property crowdfunding, – both passive investments with no hands on maintenance and management of the property itself. However, even if you are ‘leaving it to the experts,’ you should keep your eye on market conditions, and know when it’s time to review the ratio of your portfolio. If something is going to lose its profitability, get out while you can.
REIT or Crowdfund?
REIT stands for Real Estate Investment Trust, and is a company that owns and operates income-producing real estate. However, there are lower rates of return on these kind of investments, in general. That’s because there are higher expenses to bear in mind: maintenance costs and portfolios that can be complicated to manage. They’re also generally a better bet over a long term investment period, typically 10 to 20 years, whereas with property crowdfunding and peer to peer secured lending, the investment term is generally much shorter (from 3 months upwards) and the returns potentially higher – up to 12% p.a. with some platforms.
Again, it pays to weigh up your options: there are fewer hassles and potential outgoings with models like property crowdfunding and peer to peer lending, but as you are joining forces with many others, you will not have the control that some people require.
In conclusion, there’s little argument that for most people spreading your capital over a number of different types of investment is the sensible course of action. If you want to add property to your portfolio and don’t want the hassle of managing a property yourself or want to diversify as much as your available funds will allow, REITs or property crowdfunding could be right for you.
Written by Frazer Fearnhead, The House Crowd
Frazer started his career as a lawyer in the music industry. He has been investing in property since 1994 and working with other investors since 2003, helping them invest in over £60,000,000 worth of investment property along the way. He is the founding director of The House Crowd – www.thehousecrowd.com – the world’s first property crowdfunding platform.