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Times of economic uncertainty are often felt across every inch of society in some way, shape or form. The global pandemic has been no exception, and as the first national lockdown temporarily halted the property industry, a lot of landlords were left concerned about their Buy-to-Let property.
However, the market has emerged stronger than ever, propelled by a flurry of pent-up demand and the Stamp Duty holiday while landlords’ confidence is slowly, but surely returning. With the luxury of hindsight, combined with a thriving market, we are seeing more landlords look to diversify their portfolios to safeguard their returns from future turbulence.
But how will diversifying your portfolio benefit you?
Although property is arguably one of the most resilient investment assets out there, minimising the risk of a portfolio is key to sustaining a consistent, and sustainable, passive income. Fortunately, thanks to its flexibility, a diverse portfolio can be achieved with just property, and by doing so, you’ll not only reduce the impact of any market fluctuations, but you’ll lessen the effect of any void periods on its overall performance.
An added benefit of diversification is the luxury of multiple income streams, which can help landlords to achieve their financial goals. So, how can you grow and diversify your portfolio? SevenCapital, a leading UK property investment company explores three common ways diversification can be achieved using property:
Different Property Types
One of the most common ways of diversifying a portfolio is with different property types. Whether this is achieved through a combination of sectors such as commercial and residential property, or entirely based around different types of property in one sector such as residential, you’ll come to realise that each and every property type appeals more to a specific demographic.
If you’re a residential landlord looking to diversify, you’ll likely be considering houses and apartments. These two property types typically attract two very different demographics – houses are usually more popular amongst the older generation and families, while young professionals are more likely to go for an apartment.
This level of diversity can even go one step further – landlords may look to invest in a mix of studio and 2-bed apartments, for example, because these unit types cover a range of demographics that typically opt for apartment living, adding another layer of security.
By having a combination of these property types within a single portfolio, landlords can appeal to a broader range of tenants. Additionally, having these different properties, and subsequently, multiple income streams, means any void periods on one asset should be less damaging than if you were to have just a single property.
A Variety of Locations
For those who favour one specific property type, a diverse portfolio can still be achieved. The location of a Buy-to-Let property can make or break an investment, which also makes it an invaluable diversification technique.
Over the past 16 months, we have seen many fluctuations in the property market, driven largely by changes in tenant demand. While London was once a popular spot amongst tenants, we have seen more rural locations across the UK soar as some tenants searched for greener spaces.
For landlords with Buy-to-Let properties exclusively in London, for example, this shift in tenant demand and subsequent void periods could have been critical for a portfolio. However, for landlords with properties dotted around the UK, the falls in average rents across some city centres could have been balanced by the considerable rises in rural locations.
Regardless of your chosen property type, investing in a variety of locations should reduce the risk of a portfolio by minimising the impact of any market fluctuations and working towards maintaining a consistent passive income.
Also remember, it’s possible to invest in ‘pockets’ of one location – which can be especially useful if you know a local market well and want to stick to it. While this can be riskier than investing in different locales all together, certain postcodes can perform better than others which can mean exceptional returns.
Purchasing at Different Price Points
Not only do different property types and locations appeal more to specific demographics, but properties of different values also have the same effect. Typically, a property with a higher price point yields higher rents than a more affordable property. In turn, this naturally attracts more affluent tenants.
However, if you are considering investing in a more expensive property, it’s always best to consider your options. For example, if you were thinking about buying an apartment priced at £500,000, you could instead purchase two – one at £200,000 and another at £300,000. These additional properties will not only work to reduce the risk of your portfolio, but you could still be able to benefit from a higher rental income by targeting two different sets of tenants.
By investing in a combination of affordable and more expensive properties, you’ll also have the opportunity to maximise your portfolio through capital growth. Provided you have invested in a good location, the more affordable assets in your portfolio could undergo natural capital growth during your holding period, while the more expensive properties can offer higher monthly rents in the meantime. According to RWinvest, areas with positive predictions for house price growth and a track record of past investment success are something to look out for. House price predictions for 2021 and beyond show that the North West region, for instance, has the highest house price growth predictions of any region. Investing in a city with strong capital growth potential and high average yields puts you on the right track towards a lucrative investment.
Whether you choose one diversification route or a combination of all three, the benefits to your portfolio could be immeasurable – multiple streams of passive income, less vulnerability to market fluctuations and a more reliable way of reaching your financial goals.
