How to Diversify Your Buy-to-Let Property Portfolio
Many property investors find a strategy that works for them and tend to stick to what they know without ever trying something new. Wanting to specialise in an area you’ve mastered well is understandable, and while this approach may work for a period of time, having all of your eggs in one basket could be a bad idea. Market changes, legislation changes, and tenant circumstances can change very quickly – potentially exposing you to risk.
By diversifying your buy-to-let portfolio and stepping out of your comfort zone, you can protect your investments from market forces beyond your control.
Generally speaking, no properties are both high-yielding and high capital growth, but a diverse portfolio can include properties of a lower cost and higher yield as well as lower yield properties that’ll deliver healthy capital growth long term.
One void period will matter far less in a sizeable portfolio than in a small portfolio. Additionally, the financial effects of one underperforming property can be absorbed much better in a larger portfolio and reduce the negative impact.
However, even with a large portfolio, if all of your buy-to-let properties are in the same area with the same tenant type, your portfolio is less robust than you might think, and any changes could negatively affect your whole portfolio. By aiming for a large and diverse buy-to-let portfolio, you can significantly reduce the risk of impact on your investments.
Here are some ways to diversify your buy-to-let property portfolio…
- Diversify between strategies
A strategy such as serviced accommodation can provide a high-yielding cash flow but vary greatly depending on seasons. Alternatively, standard long-term lets can provide a consistent income level but deliver lower yields.
HMOs can also generate higher returns than standard buy-to-lets but typically do not generate the same long-term capital growth. Similarly, flipping a property for a healthy profit can provide the cash to purchase more buy-to-let properties and generate long-term cash flow.
By including different strategies such as serviced accommodation, HMOs and standard single lets in your portfolio, you can counterbalance some of the seasonal highs and lows and bring more variety to your portfolio resulting in healthy cash flow and long-term capital growth.
Diversify between property types
There are pros and cons to investing in houses and apartments, and many landlords prefer to focus on one or the other. Usually, investors who prefer houses claim the savings on ground rent and fees allow them to generate a better profit from houses, while investors who prefer apartments say they benefit from not having the unpredictable maintenance costs of houses. Apartments and houses are also subject to different market forces, which was clear throughout the pandemic when most tenants were craving outdoor space.
It is also worth considering the differences between old and new properties and the benefits and risks they could bring to your portfolio. For example, new builds can be extremely energy-efficient, meet EPC regulations and require less maintenance, while older properties have desirable period features that tenants also love.
- Diversify between areas
By investing in just one area, your portfolio’s performance is tied to the highs and lows of that area. For example, market changes such as the pandemic resulted in many people leaving cities to move to more rural areas with more space.
It is also important to note that the typical property cycle can pan out at different times in different locations. So, while one area may recover quickly, another may take longer.
By spreading your portfolio wisely across different locations, you can ensure that at least one part of your portfolio is always growing to offset any underperforming areas.
You can also increase your chances of investing in a ‘hotspot’ simply by investing in more areas. Some locations are strong on rental income, and others are more focused on capital growth.
The downside to many landlords looking to diversify into different areas is that the right investment will oftentimes be in a different area from where they live. But the benefits of diversification outweigh the risks if you can look beyond the initial hassle of travelling to view properties and manage a property remotely.
Diversify between tenant types
By diversifying property types and areas, you’ll almost certainly diversify in tenant type, which can greatly reduce your risk of market forces.
For example, by investing in different areas at different property values, you’re unlikely to have many tenants working for one employer or in one industry that could be subject to market forces beyond your control.
Families typically rent a house in urban or rural areas, while young people and professionals typically rent a city centre apartment. There is also another tenant you should consider as they are unlikely to be affected by market changes – tenants on Universal Credit. Some landlords prefer not to rent to people receiving benefits because of the challenges that tend to come with these types of tenants. However, benefit income is ‘recession-proof’, and these properties can be extremely beneficial to your portfolio during a downturn.
Ready to diversify your buy-to-let portfolio?
Diversification is all about protecting your portfolio from external shocks. While no portfolio is bullet-proof, by diversifying as much as possible, you can minimise the impact of any negative market changes.
The best recession-proof buy-to-let portfolio is one that consists of a variety of property types, tenant types, areas and strategies. That way, you will most likely minimise your voids, keep your portfolio generating a healthy cash flow each month, and benefit from long-term capital growth.