To Diversify or Not

I wouldn't buy in a different state just for the sake of it, judge each one on its merits.
But I would keep an eye on other markets.

 

In early 2008, a financial "advisor" recommended I sell three properties in inner city Melbourne and sink it into shares so that I can diversify my portfolio. He said it was as if I was driving a Ferrari at 200 mph without a seatbelt on. Then, he brought in another advisor who suggested I let him renegotiate my bank loans as he could get me a better rate. I didn't feel right about these ideas. So, not to be closed minded, I invested $20K in this special fund which matured in 7 years time. Well, at the end of 7 years, the special fund yielded me an additional $2K...$22K in all. Had I diversified into shares I would've been broke by now.
Fwiw, I don't diversify outside of property. My interests are inner Melbourne and a few in inner Hobart...which has finally come to life with the advent of MONA and tourism. I've never looked back.

 

Diversification is very important and with my uni quals in Financial Planning, Investments and Accounting my training tells me that we need to diversify Shares - Aussie & International, Property, Cash (interest bearing) with % based on individual risk profile, investment period (ie. 20 years + more exposure to international shares, < 5 years predominantly cash and low(er) risk property (ie not inner city units). This is what my education taught me.

Experience tells me, after seeing the inner workings of many wealthy clients, people make money out from sheer luck (seen that many times) or from investing in what they know. If property is what you know, you understand it thoroughly, then I'm inclined to say (against all of my education) to retain the high exposure to property and invest in what you know BUT you need to understand the risks and minimise your risks.

The two risks I see are - losing capital value, liquidity & net income

Risk 1 - Losing Capital Value
Remember you only lose capital value when you sell, like shares bounce around every day, if you auctioned your property everyday the value would bounce around depending on the buyers in the market at any given time. If you are purely looking for capital gain then this strategy is inherently higher risk, which is perfectly acceptable in a portfolio given that you don't have a specified time that you must exit the market or if you are forced to sell because you can't service the debt. For many of us job security is a myth and 'surprise babies' (potentially losing one income for a period of time, additional home expenses) can happen and can wreak havoc on the best laid plans. So whilst chasing capital gains is great, it isn't so great if you are forced to sell because you can't service the debt through unforeseen circumstances.

Risk 2 - Liquidity. The issue with real estate vs shares is it isn't as liquid, you can't just sell $30k worth to pay for a new car or an unexpected repair bill

Risk 2 - Net Income
Risks here are vacancy, reducing rents for ultra competitive markets, repairs and maintenance. I would always avoid having a heavy portfolio weighting in inner city units, boom and bust towns, commercial and industrial property - they can be great investments I just would ensure they are diversified as there is significant vacancy risk when there is an oversupply in the market or when business is doing it tough. The one risk which I think many owners don't take into account is the repairs and maintenance risk. We've had older properties we've sat on waiting on DA where we've put $8-$12k in on repairs in a year, I wouldn't want to have to worry about that across a portfolio of older homes. I also know of a 8yo high rise apartment that have major issues and some owners are refusing to pay there portion of the $250k repair bill, there are IP owners that can't tenant their property or sell it because of the damage (they have major water issues and only some of the high floor units are affected and the people at the bottom don't see why they have to pay for it). This risk is easily mitigated with buying new/young properties with builders insurance and the reduced risk of repairs and maintenance. For vacancy risk I think it is important to understand the area and the market, that is why I think if you are buying interstate or in an area that you don't know well you need the assistance of a professional that understands the area. You need to know what kind of tenant you are attracting and whether they are long term, pay their rent on time and look after the place.

My suggestion, look at every property on their own merits, understand the area. For example your Eagleby property - there are lots of different types of properties in Eagleby that attract different people - it has great access to M1, if it is at the higher end of the rental scale and newer property you are likely to get good commuter tenants. For me that is the attraction to Logan with the $300-$400k properties close to the M1, they are the 'more expensive' properties with higher rents that attract commuter tenants that can afford the extra $$ and pay rent on time. With the development in the area there are also new properties on the market which means you don't have to worry about the older homes and their repairs and maintenance. In my opinion demand will always be in Logan for couples and families where they are dual income where one works Brisbane other Gold Coast. It is smack bang in the middle. I would say however I wouldn't be going for the apartments or units as with the new development plan there are a lot of new 1 and 2 bedroom apartments going in so plenty of supply hitting the market over the next 5 years. The 3 & 4 bedroom house and duplex stock isn't going to be added to so that is where I would be looking in the Logan area.