Like all financial products, property investment does come with its own risks as well as rewards. Many landlords when purchasing properties have historically kept their portfolios within one sector, should that either be standard residential let’s, houses in multiple occupation (HMO), or commercial investment for example. This has meant that should one of these sectors become negatively affected, it can cause many landlords sufficient damage to their portfolios.
But what can you do as a landlord to lower your overall risk, and increase your chances of higher long-term returns? Paul Hinchley-Bradshaw, Senior Mortgage and Protection Advisor explains how you can diversify your portfolio.
Across the market in 2022, we saw an increase in landlords considering other options when it came to their own property investments, with one firm surveying their broker panels, and evidencing that 29% of landlords diversified in to bridging finance and 17% moved into commercial investments. This trend is expected to continue to grow in 2023 with 70% of landlords planning to diversify, with 45% of landlords moving into specialist buy to let investment, 35% moving into bridging finance and the largest growth expected with 39% of property investors considering commercial finance.
Below I’ve outlined some key points that can help to diversify your portfolio as a landlord:
Consider different property types
If your portfolio is currently highly geared to one letting type, such as standard assured shorthold tenancies (AST) for example, you could consider adding some HMO properties to your investment strategy. Within the residential sector, there is a wide range of sub-sectors including private rentals, student lets and supported living. All of these could be considered, with a mixture of these providing diversification.
Adding commercial properties to your portfolio has become a popular option for a number of landlords, as these values are driven by commercial activity in certain areas, which then impacts on the rent. It differs from residential property values, for example by living standards, demographics and economic activity.
Take a step back from ready to let
One area that has seen a high increase is landlords switching away from purchasing ‘ready to let’ investments to properties, where the value can be increased through either heavy or light refurbishments. This can provide the option for landlords to increase their property value and either sell this upon completion of works, or maintain the property, releasing the increased equity through a mortgage. Both options can provide landlords with funds to complete further purchases or just generate income.
Some landlords have also considered geographical diversification where they will purchase properties in different areas of the country in order to purchase lower value properties but producing potential higher rental yields- although this can come with its challenges. Therefore, I would advise landlords to complete in-depth due diligence of areas that are not familiar to them, and try to build as many relationships with other local investors and professional companies.
We are here to help
If you would like to discuss diversifying your portfolio, please contact one of our advisers who will be able to discuss your options as this will need to done in the right to match your risk type.