Diversification

Thursday, August 27, 2015 / Property Investment

Diversification is a powerful tool utilised by investors to maximise their portfolios potential.  Diversifying the types of property that you purchase within your portfolio and the location of these properties is an important strategy that strengthens your overall property portfolio.

By diversifying in this manner you are able to:

Make Strategic Decisions:   The common property types that are purchased by investors are houses, townhouses and and apartments, and by purchasing a cross section of these property types you are able to be strategic about the location that you invest in.  For example it makes more sense to purchase a 3 bedroom house in the suburbs and a 1 bedroom apartment in the city rather than the opposite as these property types are consistent with rental demand in these locations.  This strategy also assists in keeping purchases within budget and leveraging growth in areas you otherwise might not have been able to afford.

Avoid/Minimise Land Tax:  Most new investors aren’t aware that each state in Australia has it’s own land tax threshold.  Once this threshold is surpassed the owner must pay additional tax on their land which in turn increases the cost of holding a property investment portfolio.  By diversifying into other states you can help minimise or avoid these taxes altogether by staying under each states threshold.  This enables you to still have a portfolio that is the same or greater value without the additional costs.

Land Tax Thresholds:

South Australia                 – $316,000

New South Wales             – $432,000

Queensland                       – $600,000

Western Australia           – $300,000

Victoria                             – $250,000

Each state has a different land tax threshold.  Keeping your land value under these amounts will ensure you avoid paying additional taxes.

Manage Risk:  Ever heard the saying “don’t put all your eggs in one basket”?  We meet with a lot of first time investors who want to purchase all of their investments in the suburb they live because that’s where they are comfortable.  This may work for property number 1 but what about properties 2, 3 and even 4?  Buying all of your investment properties in one area means you are intensifying your exposure to potential changes in the market that are out of your control, which  in turn leaves you exposed to a greater level of risk.  Conversely if an investor spreads the wealth they are also spreading the risk as the emphasis isn’t focused on just one area to experience success.  This same concept is also relevant for the types of properties that you purchase.  If you commit to just one type of property (for example houses) and then market trends dictate that another type of property experiences the most growth (such as apartments) then you’ve missed out on a fantastic opportunity to create more wealth from your investment properties.

Ultimately investors can’t control everything.  The changes in demographics, population growth, infrastructure and property growth aren’t factors that you can influence.  However you are in control of the way in which you structure a diverse portfolio to maximise your portfolios potential and to minimise it’s risks.