Investors, especially first-time property investors, often gravitate to areas or types of properties with which they feel comfortable. And this leaves them open to risk.
As a buyer’s agent, part of your advice should be that they diversify their property portfolio to mitigate risk in any one area.
Why help your property investor clients to diversify?
In your role as adviser, you’re in a great position to help your clients to see the benefits of diversifying into different suburbs or regions, and also diversifying the types of properties they own, the price range and the types of renters their properties will attract.
Planning for property investment diversity
Before I go any further: you might not be an Accredited Property Investment Adviser. However, if you are providing actual investment advice, you must have the experience under your belt or thorough training to identify value, understand demographic trends and see the big picture.
Your role is to help property investors to understand where they’re headed. If you like, we should look at the end goal (a comfortable retirement, an income stream, potential development possibilities) and work back from there. Remember that your primary responsibility is to protect your clients’ interests. The properties you offer clients should be well researched, with all due diligence completed so you and your client are assured of the performance capability and quality of the property.
(Note: If you aren’t experienced or qualified to provide actual property investment advice, then you might steer investors in the wrong direction. Worse, you run the risk of legal action. Having acted as an Expert Witness, I’ve seen the mistakes and costly consequences of decisions by buyers’ agents who acted without sufficient property investing knowledge or training.)
How you can help property investors to spread their risk
Once you embrace your role as a buyer’s agent, and you’ve mastered analysing property fundamentals, you’ll learn more ways to help your clients spread their property portfolio risk. Below, I tackle five ways:
- Different locations
Remind your clients that they don’t need to be able to walk past their investment properties. By encouraging your clients to buy in different areas, you’re helping them minimise the risk should, for example, a natural disaster like fire or flood hit the area or (as we saw through the pandemic) there is a flight to regional houses from inner-city houses and apartments.
Imagine those property investors who, without expert independent advice, invested heavily in inner-city apartments. Yes, those properties may rebound in the medium to long term, but in the meantime they’re sucking life out of the portfolio.
Now imagine another property investor; your client whom you’d advised to diversify. And being part of the Property Mavens family, you have the contacts in (or buy in) a regional city like Ballarat, Bendigo or Geelong, all showing great growth. You might have advised your client to invest in other growth corridors in Melbourne such as the Mornington Peninsula or Sunbury.
Your buyer whom you advised to diversify might be shedding a few tears over an inner-city apartment but think how happy your would client be if they also owned a property in North Ballarat, that has increased massively in value, or in Nyah West (near Swan Hill) that’s experienced capital growth of 46.5% over the past year.
- Housing types
As I write this, houses are performing more strongly than apartments. Those investors who focused on buying apartments are feeling the pinch, especially if all their properties are in the inner ring of the capital cities. The risk here is not only that properties might be empty, but also, many property investors are divesting their apartment stock all at once, which is dragging prices down in the short term.
Is it better to own five properties under $500k or one high-quality property of $2 million?
The key issue is the client’s property investment strategy. Are they better off buying multiple average-performing properties or fewer high-performing properties? Liquidity is a consideration, because when property investors need cash, they can’t simply sell off a bedroom. When you recommend that your clients invest in property with this in mind, you’ll help them to mitigate the risk of them sacrificing a major component of their portfolio when times are tough.
- Tenants’ and buyers’ markets
Real estate sales agents know that to achieve the best price for a property, the property must appeal to the widest range of potential buyers or renters. These might be downsizers, upsizers, first home buyers, developers or property investors. A well-diversified property portfolio will help your clients spread the risk to take advantage of these different buyers or renters.
As buyers’ agents, we tend to look at long-term investments. However, some properties might be suited more to a quick turnover when market conditions are optimum. When you’re considering suitable properties, you want to be aware of the total property portfolio and the potential for each property in the mix.
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