Investors usually diversify their properties to minimise exposure to risk. But if we knew exactly where and what properties to buy in order to secure the most profitable outcomes, we could safely put all our eggs in one basket.
Many advisers say that putting all our eggs in one basket is a high risk strategy. They often recommend that we should diversify our properties to minimise our chances a negative outcome.
Their logic is that if the performance of one property falters, good performance in the rest will still give us an acceptable overall result.
What is the best property diversification strategy?
While diversifying our properties may seem to make good sense, the question then arises – how should we diversify? Some strategists recommend that we should spread our properties across several States, so that if the market slows down in one State, it may still perform well in the others.
Other advisors tell us to diversify with a mix of different property types in our portfolio, such as houses, townhouses, duplexes and units so that if demand falls for one type of property it could rise for the others.
A few theorists may even suggest that we should combine these strategies by purchasing different types of properties in different States, believing that the more our properties are mixed by type and location, the lower the risk becomes.
These sorts of diversification strategies rely more on good luck than on sound research and they can still leave all our properties at risk. More to the point, such random diversification is completely unnecessary right now, because we are at one of those rare moments in history when areas with the best potential can be easily identified.
There’s no point in diversifying if we know where to buy
With international borders closed, our governments are being forced to take dramatic and very specific initiatives to kickstart the economy back into growth.
In particular, government stimulus programs are focused on accelerating transport infrastructure projects right around Australia, from the Bruce Highway expansion in Queensland to new Metronet train lines in Perth.
These projects have the capacity to deliver the perfect trifecta for property investors - low risk, high cash flow from day one and market driven price growth into the future.
They are low risk, because they’re recession proof government funded projects which will go ahead no matter how the economy performs.
They are high cash flow, because these projects require large numbers of construction workers to rent locally while the projects are underway.
They cause price growth on completion, as they will make areas easier, quicker and safer to access.
We recently saw this with the Pacific Highway duplication from Newcastle to the Queensland border. A massive project with over one thousand kilometres of dual carriageways, tunnels and overpasses, jointly funded by the Federal and State Governments.
As the construction work progressed, a shortage of accommodation for the workers and their families sent rents skyrocketing in towns such as Taree, Port Macquarie, Kempsey, Maclean and Ballina.
This was followed by price booms in the same towns when tourists, holidaymakers, retirees and discretionary buyers discovered that they were now much quicker, easier and safer to access.
We are highly likely to see the same results again with new government funded, shovel ready transport infrastructure projects in locations where the construction workers are likely to rent locally. It only remains for you to do a little research on the potential for rents to rise during the construction phase and for buyer demand to surge when the work is completed.
Right now, putting your property investment eggs in such a government guaranteed basket could offer the lowest risk of all.
John Lindeman is widely respected as one of Australia's leading property market analysts, authors and commentators.
Visit Lindeman Reports for more information.
He has well over fifteen years’ experience researching the nature and dynamics of the housing market at major data analysts.
John’s monthly column on housing market research featured in Australian Property Investor Magazine for over five years. He is a regular contributor to Your Investment Property Magazine and other property investment publications and e-newsletters such as Kevin Turners Real Estate Talk, Michael Yardney’s Property Update and Alan Kohler’s Eureka Report.
John also authored the landmark books for property investors, Mastering the Australian Housing Market, and Unlocking the Property Market, both published by Wileys.
To read more articles by John Lindeman, click here
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.