Diversification – What is it and why is it important?

Diversification is a crucial aspect of any investment strategy, and property investment is no exception.

Diversification can have a very positive effect on an investment portfolio as it allows an investor to enjoy positive market changes in multiple areas, rather than having all their ‘eggs in one basket’.

All types of investment, regardless of the asset class, involve a certain element of risk. Diversifying a portfolio to include different types of properties, in various locations, and markets helps to mitigate risk.

What does diversification mean when investing in property?

When investing in property, diversification refers to the practice of spreading your investments across different types of properties and locations, and also rental types. The goal is to reduce risk and increase the potential for returns.

For example, an investor who intended to buy 2 or 3 buy-to-let properties and chose to buy multiple units in one development would not be diversifying. Comparatively, an investor who chose to buy one property in one particular development in location 1 and then another 2 units within a different type of development in location 2 – would be creating a diverse portfolio.

Diversification can involve a number of different strategies too such as taking a long-term view and securing property below market value off plan during the construction phase, or buying and holding properties for long-term rental income, or short-let and holiday rentals, or investing in real estate investment trusts (REITs).

It might also be that in certain market conditions, securing a unit off plan in a site that will complete in 3 years, is a good addition that could achieve greater price growth than other asset classes over the same time period.

Why Is It Important to Diversify a Property Investment?

Diversification is important because it increases the opportunity available to investors. If an area or strategy is performing well an investor will benefit and diversifying also reduces the risk of losing money if one type of investment performs poorly.

We often recommend new investors seek units in different regions, though there can be some exceptions depending on an investor’s goals. Investing in properties across different regions can help to offset any negative localised market fluctuations.

When an investor has their money spread across multiple properties, locations, and investment strategies, the risk is spread out, and any losses are less significant.

Reasons why diversification is key

Increased Returns

Diversification also offers the potential for increased returns. By investing in different types of properties, investors can take advantage of different market conditions and generate higher returns.

For example, a property in Manchester will deliver solid returns in both capital appreciation and rental yields but at a steadier pace to other lesser known, up and coming locations that might deliver double-digit growth in a short space of time.

Reduction in Risk

Diversification is key in property investment because it helps to reduce risk. By investing in different types of properties in different locations, and if appropriate different strategies, investors can reduce their exposure to risk if a local property market experiences a downturn.

Provides Access to Different Income Streams

Diversification can provide access to different income streams: Where one location might offer strong capital growth prospects, another may provide exceptional rental income but have far less on offer when it comes to capital appreciation possibilities.

Should you diversify in real estate?

Yes, absolutely. Thirmlere Deacon recommends that all investors in a position to do so should diversify their portfolios.

When it comes to property investment, diversification is just as important as it would be when investing in any other asset class.

While investing in real estate can be a lucrative way to generate additional passive income and capital growth, as with all types of investment it also comes with risks. Property prices do fluctuate, and different sectors of the market can perform differently depending on economic conditions and legislation.

This said, the overall historic trajectory for property prices in the UK continues to move upwards and the demand for rental property has never been so strong, with some areas reporting over 30 tenants chasing each property that becomes available to rent.

As Thirlmere Deacon continues to reiterate; the key to successful property investing is to have a clear investment strategy focusing on a long-term plan.

Get in touch to discuss investing in property.

2024 UK Buy-to-Let Property Investment Guide

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