If you hope to expand your rental portfolio in Peterborough this year, you’ll be considering the best way to do it. Do you concentrate your debt on a few properties through debt stacking and become an expert in your field? Or is diversification to spread risk a better route to great returns on investment?
The benefits of debt stacking
Debt stacking concentrates your resources and attention on a few properties. This means your time, energy and investment are all focused on the same types of properties and the same tenant types. While that sounds beneficial and is generally easier to manage, the challenge is that it limits your potential while exaggerating your risk. You are only serving one sector and are constrained by the economic supply and demand balance of that market.
The benefits of diversification
In contrast, diversification delivers a wider reach and a greater number of benefits. The less risky strategy is often favoured over the higher-risk eggs-in-one-basket scenario, despite the latter potentially offering higher returns.
Diversification could see you spread your investments over a number of different types of properties – traditional rentals as well as HMOs or student accommodation, for example. You might also choose to spread your portfolio across different areas of Peterborough.
This broader strategy puts you less at risk of a downturn in demand from a particular type of tenant or for a certain area. This can lead to more stable rental incomes and property values since your risk of fluctuation impacts is spread more widely. In today’s uncertain market this is a wise strategy to follow, putting you less at risk of the extremes of the market in what can be a volatile time.
What you need to consider
Diversification may offer more benefits, but it also requires extra work and so this must be considered carefully before you widen your reach. Due diligence is obviously essential. However, it’s also important to carefully consider the different management responsibilities of the various markets you intend to serve.
HMOs, for example, have different regulatory requirements and by their very nature will take more management time than standard single property lets. Maintenance needs tend to be higher since the property is subject to more intense use – several different people cooking in a kitchen, for example. Tenant turnover will also, naturally, be higher since tenants are more likely to move on. That means more time looking for tenants to fill the voids and a higher number of individual tenancy agreements to be agreed and managed.
Ensuring you have the time to manage a diversified portfolio and find new tenants as and when you need them, or a reliable agent to handle such challenges on your behalf, will be vital. Keeping on top of legislation for each part of the market, especially with new regulation such as the Renters’ Rights Bill on the horizon, will also be important. Diversification may be a sensible route for portfolio expansion, but it also needs to be a considered one.
We Can Help
At Progressive Lets we are experts in the rental market in the Peterborough area and help landlords find and manage properties within a 50-mile radius. Get in touch to find out more.
