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The meaning of Diversification

Discussion in 'General Property Chat' started by cherubym, 30th Aug, 2015.

  1. cherubym

    cherubym Well-Known Member

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    Hi,
    I'm wondering what other investors define the word "Diversification" when it comes to property investment. Does it mean investing in another state, where you already have 1 property in one state? Or another city in the same state, where you already have 1 property in one city in the same state?

    I understand land tax-wise, it needs to be state-level. What about at the city level? Different cities in the same state have different industries.

    Any opinions would be greatly appreciated.

    Cheers!
     
  2. CosmicTrevor

    CosmicTrevor Well-Known Member

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    Diversification is a risk mitigation technique, in other words you are trying to reduce the risk of something happening that could adversely affect your portfolio.

    It is a fascinating topic with arguments for and against. For example, lets say you are really expert at commercial property, but in order to diversify you feel as though you should add resi to your portfolio. You might be reducing the risk of the commercial market tanking, but you are introducing the risk of buying a poor resi IP (assuming you don't know the resi market as well as commercial).

    Thus you really need to analyse your risks in order to answer the question "what is the right diversification approach for me and my portfolio?".

    A further illustration, if you think there is a risk of the market tanking in one geographic area and you already own IP there, you might choose to buy elsewhere, or conversely, you might look for a great buying opportunity as the market tanks!

    So, identify your risks, the impact if those risks eventuate and then decide if you need to diversify and how.
     
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    I see the diversification across different property types ie commercial, retail and industrial - further diversification can be achieved across states.

    If you are adequately resourced, diversification should be across asset classes ie. Property, equities, bonds and cash.
     
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  4. cherubym

    cherubym Well-Known Member

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    Thanks, @CosmicTrevor and @Scott No Mates

    I'm particularly interested in residential property investment and established house market. I currently have 2 IPs in Ballarat, VIC and thinking of buying outside of Ballarat as the next move. So thinking of diversification, if it should be enough to diverse my next investment to another regional city like Bendigo or Geelong. Or is diversification more meaningful at state level?
     
  5. Azazel

    Azazel Well-Known Member

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    I guess some investors use it in terms of different asset classes or types.
    As far as real estate, it could mean different states, but could also be different markets in the same state as well. Many different markets doing many different things. Even if you were only investing in QLD for instance, areas are at different stages of the cycle.
     
  6. CosmicTrevor

    CosmicTrevor Well-Known Member

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    With 2 IPs in 1 regional town you are at risk from an adverse market movement in that town. But it is too simplistic to say that is problematic. For example, they may be yielding well and vacancies may be low. These are the sorts of things you should be assessing.

    Are the fortunes of Bendigo connected to those of Ballarat, do they tend to move as a single market or not? If they do, then you haven't achieved diversity by buying in Bendigo.

    As I said before, identify the risks (ie the things you are concerned about) and then structure your next move accordingly. It is too simplistic to say, "I must strive for diversification". I'm sure there are plenty of successful investors out there that are experts in their field, who would not be considered diversified. So forget the word and focus on the risks.
     
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  7. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I just stick to property and try to be the best I can be with it, rather than try to master many things and be very average with them all.

    I prefer to diversify across states so I'm exposed to as many property cycles as possible and my portfolio has a higher chance of always growing.
     
  8. Big Will

    Big Will Well-Known Member

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    You can also look at shares as a way to diversify
     
  9. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Excellent post.

    Agree completely.

    The first 3 properties I bought were all in the same suburb (Marrickville). Had I "diversified" for the sake of it, I would not have come close to those returns.
     
  10. miked

    miked Well-Known Member

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    Regarding diversification in shares - I don't really understand it all that well, so I don't plan on doing it (basically what you guys have said).

    BUT, even if I did want to do it, and I had 50k to spend on shares, why would you? While you could get decent growth on shares, you could also get similar growth with a property, but instead of investing only 50k you can borrow and invest 500k, getting that good old cash on cash return.

    What am I missing? I'm sure there's something...
     
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  11. Fargo

    Fargo Well-Known Member

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    You can borrow to buy shares too, paying 50k for interest, fees and put options can give you 500k of exposure to shares and give you higher potential growth than property. Buying a house half you 50k would be gone in stamp duty than you have rates insurances and maintainence.
     
  12. miked

    miked Well-Known Member

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    Is it hard to get 90% LVR for shares? I didn't know you could do that.
     
  13. Azazel

    Azazel Well-Known Member

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    As far as I understand, it's very risky for people who don't know what they're doing. Probably for people who do know what they're doing as well.
     
  14. miked

    miked Well-Known Member

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    Very good point. If you have shares in a company that tanks, the company could just disappear. Virtually no risk of that happening with property, if you have time you can always wait it out.
     
  15. bob shovel

    bob shovel Well-Known Member

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  16. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I have to agree with you. I think shares is fine to invest in AFTER your property base is established. just my opinion.
     
  17. Big Will

    Big Will Well-Known Member

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    Or you do it through your super and have property outside.
     
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