The risks of sticking to your area

By

15/12/2011


Question: I have bought two IPs in my local area and, while they’re not performing outstandingly, they do ok and I feel safe that I know the area. However, the more I read about property investing the more it seems that I should be investing in multiple areas/states. Is it really worth the effort to make my portfolio ‘diverse’? Am I really that much at risk if I stick to my local area? 

Answer: If we were to take the emotions away and break down the reason why people invest at all, we know the driving factor is to make money. 

Many investors acknowledge this, and are quite comfortable with buying properties due to the investment criteria and key indicators supporting their decision making process, regardless whether property is located in their local area or on the other side of the country.

When we apply our own emotions and our individual risk profile to the decision making process, our comfort zone of where we buy can often be more influenced by what makes us feel more comfortable instead of being based on where our money would obtain the best return.

I remember when I first took the step to buy outside of my own familiar area, and the fears I experienced.  After making the decision to dip my toe in the water to see how it would go, I quickly realised my fears were unfounded and I am happy to that say all my investments have achieved great results for me. In fact because I have no emotional connection to the property or the tenants, I now have more peace of mind from the properties which are interstate, which after many years I still have not physically visited, than the ones I own in my local area. 

Creating true wealth from property relies heavily on properties growing in value over time. Owning one or two investment properties reduces the chance of this strategy working, instead a larger and more diversified portfolio spread across many locations is required. Buying in the one market increases your exposure and the risk of compounding the opportunity cost which is lost if you put all your properties in a market that under performs compared to if you invested in a stronger growth market.  Different locations experience levels of growth at different times, diversifying into other markets reduces the risk associated with buying in only one area and provides a greater amount of flexibility to your portfolio when the time comes to sell some properties to pay down the debt on the ones you wish to retain.

The difference at the end of 10 years when buying a $400,000 property which grows by 6% per year compared to buying in an area which achieves 8% annual growth is $147,000.  Weigh this up against the potential additional expenses you incur when you exceed the land tax threshold for a particular state, there is an increase in the motivation for overcoming any fears to buying outside your own area.

Manage your property manager and to then let them manage your properties, after all that is what you are paying them to do. If this is done well the risk of something going wrong with an interstate property should not be any greater than it is for a property you own in your local area. 

  • Answer provided by Paul Wilson (www.wefindhouses.com.au)

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