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The importance of a diverse portfolio

By Michael Walkden

Investing in real estate in Australia has been popular for a long time, and those with a foot in the door are now reaping the rewards. However, it’s always prudent to make sure that you don’t have all your eggs in one basket. For example, you might diversify your investments by looking at commercial real estate, or even a business for sale. Why would you do this? It’s simply hedging your bet.

Rental properties and other forms of real estate have been in favour recently, but how can you be sure that you are buying into a boom area instead of a mediocre performer? The 2015 Long-term Investing Report by ASX and Russell Investments shows that even in the hot-to-trot Sydney market, some suburbs did better than others. While the median dwelling price grew by 15 per cent for the year, some suburbs did even better at 18 per cent, while others fared slightly worse at 11 per cent.

Picking a winner isn’t always easy, which is what makes a diverse portfolio a safer long-term strategy overall. Whether you branch out into local businesses, a holiday home or apartments instead of houses, there’s always a way to make sure you are spreading your risks and increasing your chances at success. Even buying in different suburbs, cities or states could be a viable way to mix up your holdings.

A prime example of how variety can spice up your strategy is the difference between units and freestanding homes. CoreLogic RP Data has recently published data on the difference between house and unit values in Australia and some of the results are staggering. For example, if you bought several units in Ascot, Brisbane, but thought better of buying a detached dwelling, you could be paying the price for that move now. The difference in value between a unit and a house currently sits at 216 per cent.

However, this needs to be balanced against the positives that apartments can offer. Not only are they usually lower maintenance, in some areas they attract a very healthy rental return. For example, apartment rentals in Hobart and Canberra have grown by more than the weekly asking price for houses, according to SQM Research.

Whichever way you decide to go, when you’re looking at increasing the size of your portfolio, homes for sale across the country hold a certain allure. The ASX and Russell Investments report reveals that median property prices have risen for 16 years out of the last 20 – not bad odds by any stretch of the imagination.

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