Join Australia's most dynamic and respected property investment community

Why Portfolio Diversification is Important to a Growing a Portfolio....

Discussion in 'General Property Chat' started by sash, 15th Nov, 2015.

Tags:
  1. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    Hi All

    I must warn everyone this is going to be lengthy post...

    I thought I would post this as a lot of people keep asking me why portfolio diversification.

    A lot of people have asked why I would spread my portfolio across multiple cities across in Australia...they ask me would it not be better off to just do it in your backyard..i.e. Sydney. My response is that you need the diversification to continually and steadily to grow a reasonable portfolio. It will take most people 10-20 years before they get a decent income...particularly if they enter mid cycle. Obviously...i am taking about buy and holds. Having said that it is also important that people buying and selling according to cycles ...will find this relevant as one market bottoms you will need a new market to continue to make money.

    Lets look at 2 examples...one is JoeOneHit (JOH) and JennySteadyEddy( JSE):

    JOH's portfolio looks like this and earns 100k:
    4 units bought in Western Sydney at an average of 200k (total cost 800k and loans of 750k)...now worth 325k each ($1.3m)
    4 houses bought in Western Sydney at an average of $250k (total cost $1m and loan of $950k)...now worth $425k each ($1.7m) total.

    JSE's portfolio looks like this and earns 90k:
    2 houses bought in Western Sydney at and average of $250k each (total cost of 500k and loan of 400k) ...two worth 850k now.
    1 house bought in Central Coast at $220k with 200k loan and worth $450k
    2 houses in Perth bought for 300k each (600k total and loan of 500k)..now worth 400k each post mining for a total of $800k
    3 houses in Melbourne bought for $225k each (225k total loan of 600k) and now worth $900.

    So in summary:
    JOH has a total portfolio of $3.0m today with loans of $1.7m..so JOH has an equity of $1.3m today.
    JSE has a total portfolio of $3.0m today with loans of $1.75m so JSE also has ane equirt of $1.3m.

    By 2016 the Sydney market corrects by 16% in Western Sydney and 10% in the Central Coast and Melborne flat lines for now with growth potential, so now:

    JOH's 4 units in Western Sydney is now worth $275k each or total of $1.1m and debt is still 750k
    The 4 houses are now worth $355k each or a total of $1.42m debt is still $950k.

    JSE''s portfolio in Western Sydney is now worth $710k and loan is 500k. The central coast is now 400k with a 200k loan. WA properties do not change and are still worth $800k with 500k owing no change. Melbourne has no change also so 900k with 600k owing.

    SO after one cycle in Sydney....
    JOH has a portfolio of worth 2.52m with 1.7m debt so equity is now 852k and LVR is 67% with very little prospects of growth for the next 7 years or so. JOH still have about 300k in equity but will be limited as banks may undervalue his portfolio further if Sydney is out of cycle.

    JSE has portfolio $2.81m...with $1.7m owing...so equity is now $1.1m and LVR of 60% with prospects of growth in WA and some in Melbourne.

    I would pick JSE's portfolio as this allows you to pull equity out as it is not exposed to one market...and when it flat lines other markets can still grow.

    This is what happens with my portfolio.......
     
    drg86, Dwalsh, Magnet and 8 others like this.
  2. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,589
    Location:
    Adelaide, SA
    Yup different places are at different points in their cycles.
     
  3. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,123
    Location:
    Kimberley and NZ
    Not a bad idea if you can spread portfolio across different countries to increase diversification further, although I understand that isn't for everyone.
     
    MTR, Ozzie in Texas and D.T. like this.
  4. melbournian

    melbournian Well-Known Member

    Joined:
    2nd Sep, 2015
    Posts:
    1,325
    Location:
    melbourne
    Different countries relies heavily on ur understanding of market and especially forex. While it might be attractive to do that there are risks associated with investing overseas which relies on relationships and networks especially property manager
     
    Finrod likes this.
  5. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,123
    Location:
    Kimberley and NZ
    Always risks involved with investing, plenty of people have got themselves in a real mess investing in their own backyard.
     
  6. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    That is exactly what I was going to say...dealing with FOREX can be a nightmare particularly when it moves against you.
     
  7. Investing101

    Investing101 Well-Known Member

    Joined:
    18th Oct, 2015
    Posts:
    60
    Location:
    Over the rainbow
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,993
    Location:
    Sydney
    Another benefit of diversifying across different states is land tax savings.
     
    wogitalia, chylld, Frazz and 5 others like this.
  9. melbournian

    melbournian Well-Known Member

    Joined:
    2nd Sep, 2015
    Posts:
    1,325
    Location:
    melbourne
    Well for those in it it's ok as AUD has gone down but to buy in it still requires more due diligence

    Otherwise u can hedge it with options depending on how much you have borrowed
     
  10. melbournian

    melbournian Well-Known Member

    Joined:
    2nd Sep, 2015
    Posts:
    1,325
    Location:
    melbourne
    Well they are some who do combo of dev, passive cashflow plus waiting on capital growth.
    So the amount of properties does not necessarily matter as incoming capital will enable ability to purchase more. If u're hands on in renovation and want to supervise imagine travelling

    Then again there are pros and cons to everything.
     
  11. Patamea

    Patamea Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    121
    Location:
    Sydney
    Another helpful post sash, thanks mate!
     
  12. skater

    skater Capitalist Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,412
    Location:
    Sydney
    This is very true, and can make a world of difference.

    Beat me to it! Land Tax is nasty.

    Even though I agree wholeheartedly with diversification, I can also see merits of holding some close, and it all depends on each person's situation and appetite for risk. There are a lot of ways to be a successful investor, and what might suit me, may not necessarily suit someone else.
     
  13. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,123
    Location:
    Kimberley and NZ
    I had a colleague who bought a few heavily negatively geared properties in WA. They bought lots of toys and didn't even try to pay any more than the minimum repayments. I did try to tell them to consider the risks in this. Not sure how they're doing now. Diversification and paying down debt are obviously important to give your portfolio a strong foundation that allows it to weather the ups and downs of property cycles. Each to their own though.
     
  14. RetireRich101

    RetireRich101 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,311
    Location:
    Sydney
    Is JOH RetireRich101?
    I would love to meet him one day.
     
  15. C-mac

    C-mac Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    796
    Location:
    Sydney
    Sash's example is great because it highlights one of several benefits of diversifying geo-graphically.

    I'd also add to this; diversity in terms of the type of stock you hold, too. There are many ways to invest and many kinds of property stock within the residential category (and of course, many within the commercial too!).
     
    Taku Ekanayake likes this.
  16. bob shovel

    bob shovel Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,379
    Location:
    Somewhere in the land of Oz
    I just read the thread title, thanks for the warning @sash! ;)

    You don't need to invest in your back yard, one there is a tenants in and you have a PM running the show there is no need for you to be within xkm of the property/s. Unless you want to save $3 and do repairs yourself go for it, but once tenants are in and doing their thing all you'll do is drive passed and day "....yep, still there "
    Provided you found a pm with a telephone you'll be the first one to know if it burns down!

    With technological advances you can get photos and reports emailed, I've also heard mobile phones can send pictures now! What a world we live in.
    Follow the numbers, diversify and sow your seeds!
     
    Ozzie in Texas and ellejay like this.
  17. euro73

    euro73 Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    1,438
    Location:
    Sydney
    It's yet another reason I love NRAS. It buys me 10 years where I dont need to fund any of the debt from my pocket, and in all probability it buys me CF+ for life - even after the 10 years, so I can be very aggressive deleveraging with the surplus money and create equity via debt reduction no matter what any market is doing, growth wise. And if as I suspect, growth cycles slow quite a bit, I can wait because I'm making money without them, and expanding my footprint without them. Of course, I have used NRAS to purchase in multiple different markets including regional, to ensure I have a strong chance of something within the portfolio being in growth phase at any point in time. But my portfolio can survive zero growth and still make me very wealthy, and give me a passive income for life
     
    House likes this.
  18. Bryan Loughnan

    Bryan Loughnan Well-Known Member

    Joined:
    20th Jul, 2015
    Posts:
    130
    Location:
    Brisbane
    Astute share investors diversify - so why wouldn't we as astute property investors? Investing is about making money, but it's also about minimising risks along the way. Properties in different locations (as already stated) can provide land tax savings and also dilutes exposure to any one particular state government. State government popularity (as we all know) can go up and down like a yo-yo. Popularity in local, state or federal governments creates confidence which in turn can drive property markets. Without confidence, people are less likely to put their hands in their pocket and pay hundreds of thousands of dollars for property.

    Importantly though, it isn't just about diversifying into different locations. You also need to focus on diversifying on the industries which drive the respective locations which you are investing in. For example, an astute share investor wouldn't say, 'I've currently got NAB shares so I'm going to diversify and buy CBA shares'. Yes - they are different shares, but ultimately they are still both driven by the financial services sector. So why as property investors wouldn't we consider the industries that drive a particular location. If we bought two properties, in completely different locations, in different states, but both were heavily influenced by tourism for example, we aren't really diversifying our portfolio as well as possible.

    Certainly heaps to think about.
     
    Subodh Shirodkar likes this.
  19. Travelbug

    Travelbug Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    312
    Location:
    Sydney
    Nah!! No one on this forum would have paid $250K average for a house in Mt Druitt.
    LOL
     
    skater and D.T. like this.
  20. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    So would I...I have a little present for him/her. ;)