Previously we note that being borderless is key to diversification. We carry on with our discussion in this segment on borderless investor by looking at the significance of investing in distinct property types. There is a growing number of seasoned property investors who discern the benefits of diversification through diverse property types and therefore regard not only where the property is located but also the actual property itself.
Each property type bears its own risk profile which are normally assessed by its potential of capital growth and rental yield. Let us consider the following risk profile of various property types for the purpose of our discourse.
1. Residential Unit
Capital Growth: Medium
Rental Yield: Medium
Risk Profile: Low
2. Residential Detached House
Capital Growth: High
Rental Yield: Low
Risk Profile: Medium
3. Commercial Retail Shop
Capital Growth: Low
Rental Yield: High
Risk Profile: High
Supposedly we decide on building a portfolio of three investment properties and determine to proceed with three residential detached houses. An adverse shift in market demand to apartment living coupled with the high maintenance and holding costs generally associated with freestanding houses clearly magnify our investment risks. If as part of the overall borderless investment strategy that we opt for investing in each of the three different property types, we would exploit the high return from the retail property in the form of rent and from the detached house by the means of capital growth, while at the same time diversifying the risk in our investment. During this detrimental market state, the rental return from both the residential unit and retail shop could alleviate the likely investment loss from the detached house.
The central objective of diversification is to minimise risk. It does not render the most positive outcome but avoid the least disapproving result. It does not provide the maximum potential investment return but extend the best possible return under the condition of controlled and manageable risks.
Without proper diversification, a marginal shift in the supply and demand equilibrium could easily turn our investment portfolio into a wrecking ball. Going back to the world renowned monopoly board game, although diversifying our property purchase cannot guarantee us a winning place every time, however it allows us the least opportunity to be victorious. Without diversification, there is zero prospect of us advancing.
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