For any investor looking to mitigate risk as much as is feasibly possible, there are various options that can be looked at. These range from being opportunity-specific (invest in EIS investment opportunities, for example, and you can reduce the amount of capital at risk to just 38.5 pence in every pound) to a wider approach to investing - and this generally comes in the form of having the most diverse portfolio you can.
From an investment point of view, diversification means spreading your capital between different kinds of investment asset classes and/or different kinds of investment products. By doing so, it can help reduce the risk of your overall investment portfolio - if one asset class underperforms, diversification should mean your portfolio as a whole still remains strong.
And whether you've only ever invested into property or you've never invested into it, property can offer a level of portfolio diversification that many other asset classes can fail to achieve.
On the highest of levels, there are two key reasons why this is the case - it's a diverse asset class itself, and the opportunities for investors are plentiful (and growing).
1. Property investing is extremely diverse
But to let is arguably the most well-known way of investing into property - but it's by no means the only way.
We go into each opportunity in-depth in our guide to integrating property investments into your portfolio, but in essence the opportunities can be categorised in two ways.
Investing in property for income and investing for growth
Firstly, we can look at how you want to actually benefit in terms of the finanical return element from property investments, of which there are two high level options:
- Recurring income – you purchase a property and earn an income by letting it out to tenants
- Growth over time – you buy a property and sell it at a later stage for a higher price than you invested (taking into account both the purchase price and any associated costs, such as improvements)
Both able to be realised across residential and commercial property investments, they each have their benefits - and even within these two options alone diversification is possible.
For example, you could purchase a number of commercial premises to use for a recurring income stream, but support this with periods of higher income by investing in residential properties, improving them and selling them for a profit.
Now this example is all based on the investor directly purchasing the properties, which leads us onto the second way of categorising the vast array of options for property investing - direct vs indirect property investments.
Direct and indirect property investments
For the most part, direct investing into property is arguably the most popular of the two. You buy a property, rent it out or sell it, and generally have complete control over the process (but with that control comes complete openness to any issues that may arise).
But although lesser known, it's the second option - indirect investments - that can provide some brilliant benefits for those looking to not be as hands on with their property investing career.
On the highest of levels, indirect property investments are those whereby you make an allocation of money to a property/properties, but it's done so in such a way that you don't actually buy the properties on an individual level.
A perfect example is investing into a fund that itself invests into a variety of property opportunities. These funds can be particularly specific in terms of how and where they invest (commercial outlets in out of town locations in the South East, for instance) or they can be much broader (for example, looking at residential opportunities for rental purposes in the whole of the UK).
While the asset class does not receive as much attention as bonds and equities, an allocation to a property fund - or any other indirect property investment option - should be given consideration, particularly for investors looking to construct an income-generating portfolio. This is because investing directly in physical property is primarily designed to generate an income, whilst indirect options usually give preference to growth.
Before moving on, it's worthwhile giving note here to equity crowdfunding, an investment option that continues to increase in popularity.
Having typically been associated with unlisted companies that exhibit high-growth potential, platforms are now available that enable the principles of crowdfunding – many investors, some investing very small sums – to translate to property. This essentially enables individual investors to become property developers by investing in special purpose vehicles (SPVs) that acquire sites, build homes, and sell them.
2. There are a growing number of property investment opportunities
There is a huge need to build more homes and improve the housing market in the UK. The government have talked about this considerably in recent times, and property featured heavily in the autumn budget.
Striving to build 300,000 homes each year by 2020, although undoubtedly a large number, many report it's not enough. Either way, the whole sector needs more involvement from homebuilders - with SME homebuilders in particular needed, due to their knowledge and experience of the respective regions - and private investors; people who genuinely want to make an impact on their lives and those of future generations.
How, when and where an investor should make an investment are topics for discussion and in many ways, dependent on the individual, but there are three pieces of information in particular that are worth keeping in mind.
- Given the changes to buy-to-let legislation, this asset is becoming less and less popular. Many investors that in the past invested in buy-to-let properties are looking for alternative options that deliver equal - if not superior - potential returns.
- Greater forecast growth in the North of England should pique the interest of investors who have previously focussed on London. This should be particularly the case for professional and institutional investors, in turn providing a confidence boost for retail investors.
- The government's commitment to housing and providing greater support to smaller builders in pursuit of this can be a clear indication to investors that smaller housebuilders can make for worthwhile investments
The property investment market has always been a thriving one, and the reality is the number of opportunities available to investors are only going to increase.
We need more homes, and to build those homes requires more money. The government will provide some of that alongside institutional funds, but the opportunities are ripe for private investors to take a stake in property.
Investment diversification in any sense is key
As with any investment, there is a risk that the value of your property investment will go up and down. That said, over time, property values have appreciated - as a long-term property investor, you are likely to increase your returns by putting part of your cash into property investments.
At Growth Capital Ventures, we don't offer financial advice of any sort and strongly recommend that before making an investment into any asset class, you speak to a professional.
With that said, what we do always stress is that we're huge advocates of diversification in an investment portfolio. From our point of view, having a diverse portfolio should be a top priority for any investor looking to mitigate risk as much as is feasibly possible.
And property can be the perfect way to achieve diversification.
Whether you've never invested in property before or it's the only asset class you invest in, it offers such versatile and varied investment opportunities that it can offer a level of diversification that in many ways simply isn't achievable with other asset classes.