Diversifying a property investment portfolio

Diversifying a property investment portfolio

Investing in property is big business. Both residential and commercial property types consistently outperform all other asset classes when it comes to returns for investors. But how do you make the most of your money when you're coming into a market you may not be all that au fait with from overseas? 

According to reports published recently, the stock of rental property available across the UK in the private sector alone is worth nearly £1 trillion, while the student property market is growing all the time, with each of the last three years now having seen more than £2 billion invested. 

While it's tempting to look at these indicators of health, as well as the strong yields and returns, and jump into spending on what appears to be a very hot area of the market, the best approach can actually be to spread your cash across a number of different property asset classes. Diversifying can be your key to real success. 

Diversify the portfolio

Even when it comes to residential property, there are a number of different classes to look out for. For example, the market for larger houses is completely different to that for one-bedroom flats. Spreading your investment out across a number of different types of asset can be the best way to ensure that you see a good return at the end of each year. 

The reason for this is simple - if you are spreading your money, the chances are that you will be less susceptible to any large changes in the market. For example, if people who were renting two-bedroom apartments suddenly see a policy change that allows them to buy their own home, then you could see a very sharp drop in demand and occupancy. By making sure you have a diverse policy, any hit from market conditions like this will be less significant. 

Keep your diversity comfortable

While it's advisable to keep a good spread of property types across your portfolio, it's equally important to make sure you aren't spreading the investment too thin. On one hand, while diversity protects you against falls, any uptick can be less significant if you have your finger in too many pies. 

Having just a little bit of money invested in a number of different property types will mute the effect on your returns of one really picking up pace. For example, if London's jobs market for graduates was to pick up, you want to have enough smaller graduate-suitable apartments available for the influx of business, or it's unlikely that you'll see the benefit in your bottom line. 

Know when to make a move

For many people who are new to investing in property, it can be tempting to put your money in and then adopt something of a passive "wait and see" approach to the outcome of what you're invested in. Those who have a more active outlook, however, are far more likely to enjoy success in the long term. 

A good example of this is weighing up rental yields against capital gains. For example, if you have bought stock that suddenly sees a strong rise in its value, you need to be aware of it so you can put it to market rather than holding onto it. It lets you make the most of an upturn in the market before any potential fall. 

On the other hand, if you have committed to buy-to-let, you need to be prepared to be in it for the long haul. These properties might not bring in the sudden cash injection that a sale of a home will, but they are a great part of your portfolio to have in order to keep your income ticking over over a period of years, especially when the market is performing as strongly as it is right now. Just remember that it's important to know when to hold on to them. 

Overall, the most important thing to remember is that diversity can be the key to access. By having access to different areas of the market, you will be able to benefit from gains in each, while also being somewhat protected against large falls, giving your investment a far better chance of long-term success.