Your Eggs Are Probably All In One Basket

Owning an investment property has always been fraught with risk (not that you would know it from the past 30 years of Sydney price growth!). The last 12 months have started to teach investors that the market is a two-way street and paying attention to risk is vital.

One of the largest risks is concentration risk. Concentration risk is the proportion of your assets that are tied up in a single asset. The vast majority of investors have a single investment property, giving them the highest concentration risk possible. Moreover, the asset is often worth many multiples of salary or other income, meaning slight changes in the value of a single property can have a profound impact on your wealth.

Understanding Concentration Risk

To understand concentration risk it’s important to understand that there are two drivers of returns from an investment property. The first is capital growth which is primarily driven by demand exceeding supply and a range of macro factors such as interest rates and credit availability. The second driver of return is the cashflow generated by the property primarily from rent. The rent you receive is primarily driven by the number and availability of similar properties in your suburb.

The only way to reduce the concentration risk associated with capital gains is to purchase investment properties in multiple suburbs and with different characteristics. However, the obvious limitation to this approach is constraints around financing such a large portfolio. Concentration risk associated with rental income however is different. For an investor with a single property, their entire rental income is dependent on a single tenant. This is inherently risky, as your bank still requires you to make repayments on your loan regardless of whether your tenant is in arrears or your property is vacant.

Clients of Certainty Property do not experience concentration risk associated with rental income, as we provide a rental guarantee as part of our property management services. If the property is empty or the tenant falls behind on rent, we continue to pay the rent instead for the life of the property management agreement.

To find out more about how to reduce concentration risk through property management, please reach out via simon@certaintyproperty.com.au