Why is it important to have a diverse property portfolio?

Why is it important to have a diverse property portfolio?

Diversity is one of the most important words in property investment. And there are a number of ways you can be diverse with your investment; geographically and also economically.

Geographical diversity relates to purchasing property in different locations, such as Sydney, Melbourne or Brisbane. They are all going through different growth cycles, so while one is booming, the other might be just gearing up.

To be economically diverse relates to purchasing property in areas that are not restricted to one industry, such as mining. If you purchase in an area with long term sustainable growth, with multiple industries, then if one industry dies down, another will pick up the slack.

It’s a win-win, right?

So what do eggs have to do with it?

Have you heard of the old proverb of putting all your eggs in the one basket? Meaning don’t have all of your resources in one place; and avoid putting all your money or hopes or future into one thing.

‘Eggs’ are delicate, and if all of your eggs were in one container, and that container was damaged, you’d likely lose all of your eggs in one quick and painful moment.

Definitely not a win-win.

One property or two?

If you have one property in Sydney, which you purchase for $900,000, the land is worth around $600,000 and the building is worth around $300,000. You can only get one rent on the property, and any tax benefits would be on the $300,000 worth of building.

If you bought a property in Melbourne and/or Brisbane, you could buy the same building but pay half the price, so potentially you could buy two properties for $450,000 each, the buildings would be worth $250,000 on these two properties and the rent would be around $450 a week per property.

If you do this sums, you could have two properties at a $900,000 combined value, rent is $450 each so that’s $900 a week rent. Plus you’ve got two buildings at $250,000 for tax deductions, instead of one at $300,000.

Phew. Back in a winning position.

What about land tax?

Most states in Australia (except the Northern Territory) impose a land tax. Land tax is based on the accumulated value of all unimproved land that you own, other than your principal place of residence in any particular state.
In the case of the property in Sydney, it will attract land tax as it’s over the land tax threshold in Sydney, whereas the properties in Brisbane and Melbourne will not attract land tax as they are both below the land tax threshold of their respective states.

Balancing on two legs...

One of the benefits of having a diverse property portfolio is if one property doesn’t get rented out, you’ve got another property being rented, and that will keep you cash-flow positive.

Rene says “Think about the two properties as legs and how they balance, if you’ve got two legs and I bump you, you’ll probably still stand. But if you’ve got one leg and I bump you, then you’ll probably fall over. That’s why having a diverse property portfolio is essential.”

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