Remember to diversify your investments as you grow your buy-to-let portfolio. Keep investing in one type or area of property is no wise strategy because it limits your potential and you become open to failure if the market slows or collapses in your niche.
Therefore, consider investing in a different property area or type when adding additional properties to your portfolio.
Have an exit strategy.
It is said, ‘Start with the end in mind’, this statement sits perfectly when we talk about property investment. The property market is highly expensive and little negligence and miscalculation might cause a huge loss. That’s why each time you buy property, consider what to do with this property when needed to sell it. This is the initial thought you should consider when investing in property.
Always keep your exit strategy in your mind and it will help you make sensible decisions in investments.
What is Property Diversification?
Harry Markowitz, Nobel Prize laureate and economist, once said, ‘diversification is the only free lunch’ in investment.
But what does it mean by diversification of the property? diversification is a risk management strategy that balances risk and reward within an investment portfolio. By diversifying your portfolio, you can protect yourself from the fallout of the public market experiencing volatility because you will have alternative investments to withstand any downturn.
Diversification in your investment portfolio helps limit your exposure to any single type of asset, therefore helping to reduce volatility and the risk of your portfolio. Investing in multiple assets is essentially an effort to mitigate risk in each class.
Diversifying portfolio by types
It is a wonderful idea to diversify the type of tenant, as it will insulate investors from issues affecting a particular type of tenant. However, the type of tenant is a good way to dictate the property type as a good tenant will ascertain certain attributes of the property. Alternatively, if an expat or foreign national investor has a particular type of property that are going to invest in, then this can determine the type of tenant they are likely to attract. Therefore, it is important to get the consultancy of a property expert about the way you want to diversify the property to determine other things about the property. For example, if an investor wants to attract a young professional tenant, he will be better off investing flat in the city centre. This is good news for many investors both expat and foreign nationals that these types of properties are incredibly mortgage friendly.
Diversifying property portfolio in industrial, residential, and commercial
There are different sectors to explore and spread your money to maximize your chances of rental earnings and capital growth.
Industrial properties
Industrial real estate refers to any such property that is used for industrial purposes such as production, storage, manufacturing, and distribution. These properties include factories, data centres, and warehouses.
Compared with residential properties, industrial properties typically have longer leases, industrial tenants are keen to sign longer leases of up to ten years; this is a sort of surety to assure the security of the investment for investors.
Industrial industries are less accessible to individual investors because these properties are larger and require higher upfront capital investment. However, rental rates for industrial properties are much higher which means they have the potential for higher yields, typically, the rent is double what the residential properties can generate.
Residential Properties
Residential properties refer to property that is used for residential purposes and ranges from a single unit or house to large apartment complexes. Due to the increasing demand for the property, residential properties have relatively stable demand.
There are two major types of residential properties single-family residential properties and multifamily residential properties, such as triplexes, duplexes, and fourplexes are smaller types of residential properties that can still generate significant returns for investors. However, those investors who have huge funds can look into larger residential property options such as apartment condominiums or complexes.
Typically, residential property investment involves renting out the property to generate rental incomes from tenants. However, it is equally important for investors to conduct research to make the property has enough demand to generate rental revenues.
There is a degree of risk involved in the residential properties and comparatively speaking, they have shorter leases than commercial and industrial properties, averaging about 12 months.
Commercial properties
Commercial properties refer to properties that are mainly used for commercial purposes such as shopping malls and office buildings.
Typically, commercial properties’ returns are higher than residential properties with yields ranging between 5% and 10%. Leases for commercial properties are also longer than for residential properties, ranging from 3 to 5 years. Commercial properties tend to use net leases like double net leases or triple net leases instead of gross leases.
Holiday Accommodations
The UK is an attractive destination for overseas and UK-based tourists alike. No matter which time of the year, there is always a demand for accommodation. It is because of the historic, artistic, social, political, and cultural beauty and distinctiveness that, it is a dream of the visitors to go and explore its diverse verities in different forms and shapes. The incredible point is there are different types of tourism-related properties to invest in to diversify your property portfolio.
Invest in an ideal holiday home
When investing in a holiday home, consider facilitating it on a priority basis as almost all visitors prefer a home that is well-furnished to afford them socializing, entertainment, and comfort. It should be far better than the traditional hotels.
Tourists prefer home over hotel because they feel free to do whatever they like with family members, unlike hotels where they have to face restrictions from the hotel staff. Before investing, make sure, there is a supermarket and an entertainment place in the nearest where people could where visitors stay entertained.
With the increasing trend of tourism, surely, your investment will pay you higher rental income and capital appreciation in the future.
Holiday Cottage
Usually, a holiday cottage is a small home that is recognized as a modest building in rural areas and visitors fantasize to spend holidays at such locations with families. When people are tired of city life and seek mental peace and gratification, they mostly prefer spending time in rural areas with nature. Therefore, buying a cottage in a rural area will generate a much better source of income.
Holiday Mansion
If you have a huge fund, invest in holiday mansions. Since a mansion is a big house that big families or groups of families prefer to stay in during trips. Mansions are also of two types, one with compound access to lots of shared activities and another. While another is for those tourists who are interested to have a more private setting and a mansion with its own game rooms, gym, cinema, and swimming pool is suitable for such types of tourists.
Holiday country home
The trend to spend time in the countryside among citizens is rapidly increasing, due to the overwhelming impacts of the use of different apps on the internet. The excessive use of social media has brought about a huge shift in terms of the thoughts and actions of people. People feel themselves to have become ‘robots’ and their feelings, emotions, and thoughts have considerably become dormant. Famous writer, Alan Lightman who is a writer, physicist, and social entrepreneur wrote a book ‘in praise of wasting time’. In that book, he shared that until society unplugs itself from social media apps like Twitter, Facebook, Instagram, etc. they will socially, mentally, and physically weaken themselves. That’s why more and more people are increasingly becoming fed up with this artificial sense of life and moving toward a natural environment on trips to give some time to themselves while doing self-reflection on the healing and soothing calmness of nature.
The people of Britain have a historical link with the countryside as in the past many wealthy families and English aristocrats would own two houses: a main house, which was their residence, and the country house where they would spend their vacations with their families and friends.
Given the historically attested inclination of the English people toward the countryside and the keen desire of the overseas visitors towards Britain are the right reason for you to make some investment in the holiday country home. It will ensure a steady flow of rental income and capital appreciation.
Diversifying portfolio by geographies
It is one of the convenient ways for expat and foreign national investors to diversify the location of investment in the UK. The market where the property is located has a huge impact on the portfolio of investment diversification. Market selection is an important part of the real estate investment process and holds huge potential for diversification. This is the reason why most investors invest across different markets to avert concentration risk. Deeper markets, even within a single country or city, have a higher potential for diversification while smaller markets offer less potential for diversification. For example, an investor can diversify his properties by investing across different countries, different cities of the same country, and different regions of the same city.
Here it has been noted that sometimes investors prefer to make their whole investment in an area that is strongly performing but they forget the market never remains the same for a long while and if something happens you are not prepared for, it might result in a huge loss. For example, if an employer offering a well-paid job leaves the area, there is a higher likelihood to affect the tenant of that area.
In practice, it is itself an investment strategy to diversify the location of an investment portfolio to minimize risk. For example, if an investor invests all his budget to buy a property in London could invest that whole deposit to buy more affordable properties in another area. This is diversifying property, instead of buying a single property in one area, has purchased a number of diverse properties in different areas. This is itself an investment strategy as the investors will be paying down the capital value of two properties simultaneously and seeing two lots of rental earnings.
Currently, city centre areas are increasingly becoming the most popular locations for investment, with tenants preferring proximity to social venues like clubs, restaurants, and bars, while also having employment centres at a close distance. Obvious choices for expat and foreign national investors might be London and Manchester because there are so many outstanding city-centre locations that are growing in popularity for investors and tenants. For example, Sheffield, Birmingham, Leeds, Nottingham and Liverpool have all become hugely popular and guarantee both strong capital growth and excellent rental yields.
Recently, there has been a significant rise in tenant demand in the affordable urban areas outside of the city centre. The reason behind its rising value is well-known as there are good employment opportunities and great commuter links to big cities. For this reason, Crewe, Coventry, and Bradford currently have some of the highest levels of demand in the UK (60.7%, 47.3%, and 46.8% respectively). An expert UK national or foreign national mortgage broker can help to identify the areas which might be of huge interest for the specific investment goals of investors.
Diversifying the sub-sector
You can diversify property types by choosing a different sub-sector for the investment. In the recent time, the most popular types of sub-sector have been private, student accommodation; long-term lets, and holidays let. Long-term lets investments are tried-and-tested investments that are the favorite choices of the expat as well as foreign national investors. This is the reason why property experts suggest that investors should start from here. However, over the recent years, holiday lets have also grown in popularity and are a great way to diversify a property portfolio that already contains some long-term lets.
2023 looks like a great time to get a holiday get as the rural and coastal hotspots of the UK are set to have the biggest drop in prices owing to the cooling demand for properties in these areas. While price growth in these rural and coastal areas has been slowing generally, the greatest slowdown in demand and sales has been in coastal and rural areas such as Wales, Lake District, and East Kent. Compared with conventional long-term lets, holiday lets can also prove to be less pressured as they typically make big sums in a relatively short window, namely during the summer and spring seasons. This can significantly reduce pressure on UK expats and foreign national landlords.
Another excellent way to diversify your portfolio is through student accommodation. It is often highly mortgageable and affordable which is good news for investors who want to further diversify property portfolios while being conservative with their spending. The student population of the UK is massively growing all the time, with 1.75 million full-time undergraduate students in 2022, that’s why, there is a guaranteed pool of renters in the student sector. Universities are not capable to provide accommodation to students in such a large number, meaning it is the private sector to make up the fall. The higher rental income of almost above 8% for these properties reflects that there is a huge potential for investors to explore this area.
It is also no denying the fact that diversifying the property portfolio is one of the important strategies for a successful investor. But it is also important for investors to first get expert opinions from experts who have a profound understanding of the UK trend property.
Put your portfolio diversification into practice.
While diversifying a portfolio might seem like a daunting task, it’s actually far easier for UK expat and foreign national investors to accomplish now than it was when we started Liquid Expat Mortgages’ says Stuart Marshall. ‘The advent of specialists UK expat and foreign national brokers has been a real game changer and made the process of investing in multiple properties far easier for UK expats and foreign nationals. An expert UK expat or foreign national mortgage broker can work with an investor to decipher their goals and help them to find the properties that best satisfy these. They are also able to unlock access to specialist products, deals, and rates which can improve the overall profitability of the investment, as well as help with the process of finding a suitable way of managing the portfolio and minimizing risk.
For existing UK expats and foreign national investors who want to re-structure their portfolio to be more diverse, re-mortgages have been an incredibly powerful tool in recent years. Re-mortgages allow UK expat and foreign national investors to use the existing equity in their investment property to buy other properties. For UK expat and foreign national investors with an existing portfolio, re-mortgaging one or more properties is a good way to make further investments and add to the diversity of a portfolio. Even for UK expat and foreign national investors with one property, a re-mortgage can be an excellent way to use the equity they already have to start a diverse property portfolio which will pay dividends both now, and long into their future.
