[insight] Why it’s so important to diversify your property portfolio

Warren Buffett says to invest only in what you can understand. He doesnt mean this as an invitation to laziness since his own example is to move into new areas, having first put in the time and money to research these new ventures thoroughly – and to understand them.

Established wisdom is that diversification of assets is an important investment tool. A carefully chosen balanced portfolio allows you to spread the risk to your portfolio without necessarily reducing the returns. The same number and  value of eggs, but in different baskets.

How does all this relate to property?

Understanding just one form of property investment would I believe be a disservice to your future. But here’s the rub: it’s comfortable to stick with doing what you know; you become an expert with a deep knowledge of your chosen specialist property subject.

UK Buy-to-let investors often concentrate on one aspect as THE way of securing their future income. I’m speaking from personal experience when I say that it is easy to be bitten by the bug of building a buy-to-let portfolio, and just going with what you know.

Buy-to-let alone can feel safe enough to put all the eggs in that basket, but it can be risky as like most investments there are many factors outside of the owners control, for example:

  • Lenders’ and Bank of England interest rate rises
  • Property market collapse and distressed sale of your property 
  • Legislation changes in favour of tenants
  • Lenders changing their tune when times are hard
  • Rogue / destructive tenants

These are all real examples that have happened and have hurt. Many of these can affect your entire Buy-to-let portfolio and, if you’ve sunk everything you have (and can borrow) into it, your future well-being.

Having come through the worse UK property crash in decades, many experienced landlords that survived it realise how close they came to a meltdown and are looking to diversify. They’re not looking to the traditional financial institutions as there is still a deep mistrust of them. These investors know how powerful property investment is so are looking at other ways to invest in more property, but not just more of the same.

What other ways to profit from property?

Fortunately (and partly as a response to the world banking crisis), there are several new and interesting ways to invest in property alongside buy-to-let including:

  • Fractional Ownership of managed commercial property
  • Shared Ownership
  • Property Bonds
  • Crowdfunding
  • Land Purchase
  • Offshore
  • Hotel Room investment

Few of these offer any gearing – 100% of the investment is in cash. Many landlords found themselves stretched by too much borrowing in the credit-fuelled boom of the early “naughties”, so this is often seen as a way of reducing the overall portfolio gearing and exposure to interest rate rises and mortgage lenders’ well … shenanigans.

The other key benefit is that each of these property investments types offer pretty pure Passive Income (something that Buy To Let promises but seldom delivers). Just like picking stocks, you do your research upfront and when satisfied, you invest. Nothing more to do during the lifetime of the investment. And unlike stocks and shares there are no ongoing broker charges that frequently reduce your net returns to the tiny interest rates many have come to accept in the UK.

In essence, don’t be seduced by those who would tell you that Buy To Let is the single key to property prosperity. The stakes of sinking everything into it are high and the hassle factor stays with you as long as you own those properties.

Diversification in property can mitigate these risks now and build you stream of true passive income to enjoy in your dotage in years to come when owning flats and houses is no longer as much fun as it used to be.

With so many flavours of property investment available today, we teach our clients to plan their own mix to match the life they want to lead both now and in the decades ahead: property for income, for growth and indeed for enjoyment.

Mr. Buffett puts it very well: “Someone is sitting in the shade today because someone planted a tree a long time ago.”

I’ll leave you with one example of alternative property investment: fractional ownership. Find out how it works with our essential guide. Just click on the image below to get your copy.

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