Diversify your portfolio
If you already have one or a few properties in an area you are ready for the next step: Diversification.
To have an efficient and well balanced portfolio, it is important to diversify. Even if the property market is not too correlated to other types of investments, there are market specifications inside the property business. Thus, it is important to have an idea of how much you are planning to spend on the purchase of a property This will help you build a strategy and determine what sector to invest in.
1-The 3 types of properties assets
The Core plus properties:
They are prime property assets which are not subjected to changes in the economy. They are considered as the safest properties to have in the long term.
Examples of core asset locations: London, Manhattan, Paris, Monaco.
The starting price for such places is high: 300,000 Euros for Paris,$600,000.00 for Manhattan, £500,000.00 for central London, 2,000,000 Euros for Monaco.
With such prices, your asset becomes less dependent on debt financing. Properties in these areas are bought by wealthy investors who can afford cash transactions or transactions based on their equities. Core assets, usually generate a good stable income of around 5%.
Secondary and value-added properties:
They are also known as up and coming areas or regions. Depending on your scale of investments or diversification objective, you will consider different types of secondary properties.
If you wish to diversify within a country or a region, you should look at regions with above the average future growth rates. The area should be economically and politically stable.
If you wish to diversify within a country, you should look for areas that attract middle-class residents, and where the number of companies is growing. They are usually close to prime locations, or can be secondary cities. They offer good transport links to major cities, good schools, and have low unemployment rates forecasts…
They usually offer income yields of around 8%. Their prices are more attractive than in major cities or city centers
However, they are more likely to suffer from price volatility as they depend more on the domestic economic situation. Their main advantage is due to the “catch- up effect” that drives their value up.
Usually, opportunistic assets offer income yields of above 10%. They are a lot cheaper than the two other types of assets, but investors should be aware that they are riskier: Politically (governmental conflicts, regional wars), economically (developing economies , inflation issues, currency fluctuations), ownership property rights (the ownership right is uncertain, or requiresthe intervention of a local agent).
This creates much volatility in the prices. You may achieve a return of more than 100% in a few years, but you may also lose your investment completely.
2- Define your attitude to risk
In order to make the most of your portfolio’s yields you need to be aware of your attitude to risk. This means knowing how much you can cope losing before being able to earn more money when things go well.
If you are naturally cautious, you will not want to risk losing any money. People matching this profile should mainly invest in prime properties in capital cities.
If you are prepared to take some risks, you may wish to add some secondary properties to your portfolio.
Opportunistic assets should only be purchased if you feel ready to take risks and expect them to generate substantial gains.
For the most seasoned investor, the ideal combination is 60% of prime assets, 20% of secondary assets and 10% opportunistic assets.
3-Good reasons to diversify
Diversification protects you from cash shortfalls. Selling a property can take up to a year and even a quick sale can take a few months. So, by splitting your portfolio into a few assets instead of relying on a single large property, you are decreasing your exposure to liquidity risks.
Diversification protects you better from losses of income. If you have any tenancy issues such as with a non-paying tenant, or a property that takes time to be let,you may experience a very tough time with bills and mortgage repayments to be paid and no money coming in. When your income is generated by a few properties you are better able to cope with tenancy issues for a while.
Diversification protects you from the consequences of currencies weakening. Some investors diversify to receive an income in a strong currency. Alternatively, you may wish to use certain currencies to purchase a valuable asset at a discounted rate.