One word: DIVERSIFICATION!!
What does that mean?
Don’t put all of your eggs in one basket.
If you want to build a residential investment property portfolio, you can diversify by choosing different geographical locations around the country to avoid risks associated by one area, such as a downturn in a local economy…
THINK Greymouth closing down of the coal mine and all those miners losing their jobs. No jobs = can’t pay bills = no spare cash = local businesses profit drops = house prices fall.
THINK Tauranga, a disaster hits which sees Kiwifruit production decline for 3 years, PSA or major hail storm = land prices fall, loss of jobs in that industry = no spare cash = land prices fall.
THINK Christchurch – earthquake.
THINK Auckland – Volcanoes, or global financial crisis which sees values drop dramatically.
THINK Wellington – way overdue for a big earthquake.
Some of these risks can be minimised by good insurance policies of course, however think about how long it took insurers to start paying claims in Christchurch, and think about the double hit you would take – tenant stops paying rent, but you still have to meet the mortgage repayments!!
If you are diversified, and something happens to one area, at least the risk is confined to one portion of your overall portfolio as opposed to your whole portfolio.
You can diversify into other Asset Classes, such as Shares, Cash, Bonds, and Government securities.
You can further diversify within these assets by spreading your exposure in that asset class to several different individual companies across different industries.
You can further diversify by investing in these assets but away from New Zealand.
The theory is that if you are diversified sufficiently, you can calculate the probability of a loss happening, the cost of that loss, and confine it to a small part of your portfolio.
It is the smart way to do things - if you have investments, it is way better to spread the risk. Always happy to have a chat!
As well as being a professional and highly-qualified investment advisor, Craig has over a decade of experience as a mortgage broker and insurance broker. Contact us to chat anytime about mortgages, insurance or a financial plan for your future.