If you’re thinking about moving toward property investment as a sole (or significant) source of income, then just one isn’t enough—it can’t secure financial freedom or retirement security on its own. Likewise, just one type of property may not be enough.
As with any kind of investment, diversification is key to success—and building a diversified property portfolio with lots of growth potential will help you achieve that.
The benefits of a diversified property portfolio
Different geographical areas’ real estate markets grow at different rates, and at different times. If you buy numerous properties in one booming market, all at once, you might break the bank. Buy them all in an area experiencing a slump, when they’re more affordable, and you may end up sitting on those properties for years, waiting to be bailed out.
But, if you own a number of different types of properties (single-family home, apartment, condo, boarding, commercial), in areas with different real estate markets and economies, you may find that a few can carry the rest through tough times.
A property that had a sky-high ROI five years ago might have a pitiful yield this year. But when your portfolio is diversified, you eliminate the risk of all your properties being in that state at once.
Passive income is a big draw for property investors. It’s an even bigger draw when it increases every year. Most mortgages have fixed interest rates, and therefore the payment stays constant for the duration of the loan. Rental rates, however, tend to increase as years pass. That means built-in cost-of-living increases for you…and the more properties you own, the more financially sheltered you will be.
And those properties that do well? They’re good for more than profit. You can also access that rapidly growing equity to borrow and add to your portfolio.
And finally, I think we all know about the value of side hustles and multiple streams of income. If all your earnings come from one source (a 9-to-5 job, for instance), and that job dissolves, how will you support yourself?
Losing your main source of income is always troubling, but if you have multiple streams filling that tub (and only one drain for expenses), then your security is multiplied. One revenue source might disappear, but when your income is financially diverse, you won’t lose it all.
Adding property investment to your income is one way to diversify. Adding multiple types of properties, in multiple geographic areas, offers even more financial security.
How to build and grow that property portfolio
A real estate property portfolio starts with one property, but not just any property. There are a number of considerations that should be made, and they all have to do with meeting the objectives you’ve set.
Knowing what goals you wish to reach through property investment is essential. How much money do you need to earn? And in how much time? Knowing the answers to these questions will help you build a portfolio that has the right level of potential, with a reasonable amount of risk. The first property you choose must have enough capacity for growth to sustain itself, as well as enough yield to put some aside for portfolio addition number two…and so on.
Real estate is much like other types of investment, in that with higher risk comes greater earning potential—so you’ve got to decide how much loss you can tolerate, and how much time it will take to recoup those losses (and still reach your goals). Higher risk properties have more earning potential, in shorter amounts of time. Lower risk properties will yield less but will prove to be more stable.
This is why diversification is so important; experiencing losses in every part of your portfolio could devastate your goals.
So do the math. The purchase price, repairs and improvements, operating costs, anticipated revenue and maintenance, and resale price all contribute to being able to leverage current properties’ revenue and equity to acquire new properties and further diversify.
Start with one property. Learn from it.
Then, use its revenue and equity to add properties that are diverse in type and location.
Assess risk. For instance, make sure you’re not investing in multi-family units in a city where duplexes and apartment buildings are sitting empty. Find a place that’s prime for real estate investment. Then, look into what types of housing are in-demand and buy based on that.
And finally, managing your property portfolio might get complicated as it grows. Consider refinancing so you only have one mortgage payment. And look into all the benefits that PropTech has to offer. You can vet applicants, retain contracts, share forms, collect rent, communicate, schedule service and much more…all in one app from anywhere in the world.
Having everything in one place and online is not only convenient but saves you both time and money which you can then reinvest into growing your property portfolio.