The Unlimited Potential of Diversifying your Property Portfolio
Category Advice
Whether you're an experienced commercial investor or one who is just starting out - you may have considered diversifying your property portfolio. However, many avoid taking the leap as this will require increased capital. The good news is that diversifying, when done right, leads to increased profit in the long-term and is less risky because you are not solely dependent on the highs and lows of a single market. Furthermore, it serves as a lucrative retirement strategy, offers tax breaks and the income generated can pay off loans on other investments.
Geography vs Property Type
There are two primary ways investors can diversify their portfolio - by either investing in different property types or in different geographic locations.
Investors who use geography to grow their portfolio focus on buying properties in different towns, cities and regions. Their main focus is the long-term potential of an area as this is a good indication of whether or not it can generate healthy returns in the future. A priority for investors is to analyse the development pipeline in various locations - a strong pipeline indicates long-term growth and developer confidence.
Often, when investors use geography to grow their portfolio, they will split it between primary locations and secondary locations. For example, a primary location will be where their bi investments will be found, such as Sandton, Midrand and Bryanston, and secondary areas can include smaller markets such as North Riding (Randburg) and Laser Park (Roodepoort). Generally, primary and secondary markets have a high or growing population that offers large returns on investments.
Another way to diversify your property portfolio is to focus primarily on investing in different property types. This will involve an in-depth understanding of which property types (office space, industrial space, retail etc) is receiving the most return in a specific market. You can take this a step further by finding which grade (Grade A, Grade P, Grade C) is performing the best. For example, in Gauteng, Grade A warehouses and Grade P offices are generating some of the highest returns, as a result, a growing number of investors are injecting capital into these property classes.
Buy-to-let Investments
One of the most effective investment models is buy-to-let - where an investor acquires a property to rent out to tenants. The most important factor when choosing a buy-to-let property is selecting an area that shows strong rental demand and good prospects for future capital growth. Most advantageous, buy-to-let properties allow bond repayments and other property costs to easily be paid off using the rental income generated each month. Furthermore, long-term lease contracts mean that rental income will increase year on year, and over time, the property will start producing a monthly profit which will escalate when bond repayments are paid off. And provided the property is well-maintained, it will grow in value each year (capital appreciation), meaning if (or when) the time comes to sell, it can be sold at a high(er) price.
Consult a professional
With any venture that has an element of risk to it, it is always advisable to enlist the expertise of professionals. For diversifying an investment portfolio, this step becomes imperative. A reputable real estate agent/agency will guide you through the ins and out of the various property markets, provide insightful information such as demand and vacancy rates and help you understand the dynamics of various locations. They can also take it a step further by providing guidance on how to apply for a loan at a lending institution - this is of particular importance as securing finance on a commercial property requires larger deposits and a solid business plan.
If 2019 is your year to diversify your property portfolio or if it is your future goal, we at 3CUBE Property Solutions can help you through this process - our unique insight, professional opinion and in-depth knowledge of the Gauteng commercial/industrial market will guide you along as you grow your investments.
Author: 3CUBE Property Solutions
