As the saying goes “Don’t put all of your eggs in one basket”, so should prudent investors not concentrate their funds. Spreading the risk across a number of different loans and different Borrowers will help form a sort of capital protection. Of course that doesn’t mean that diversification will guarantee zero losses, but it will help minimise the risk involved if one loan goes bad. So how can you diversify your portfolio? In this post we will look at the three main ways to diversify your portfolio with regards to property backed loans.
Loan type
One benefit of peer-to-peer property loans is that it allows you to invest in property types that you would otherwise not have access to. Residential invesment is one of the most popular types since they are one of the easiest to understand and invest in with higher supply and demand. But it is important to also look at other catergories such as retail, offices, industrial and leisure property investments which will give Lenders a broader hold on UK property.
Borrower
It is important to not only look at the asset when assessing a loan but also at the Borrower’s background. Although a particular Borrower may have excellent knowledge and experience when it comes to property puchasing/development, it will still be wise to not put all your capital into the Borrower's projects. This is because if they were to fall into any hardship, it may then affect all their loans and thus all of your capital. Of course by having invested in a secured loan, you will have the security of the property to regain your funds but it could be a long and ardous process due to the legals.
Location
Last but not least we have location, location, location. London may be everyone’s darling when it comes to capital growth but many cities throughout the UK are set to compete with it. Richard Donnell, Hometrack research director says that as long as the economy continues to grow and interest rates remain low, cities such as Liverpool, Glasgow, Birmingham and Manchester are likely to see house prices rise. Bristol is also a city that’s seen rising business investment, a thriving tech economy and growing demand for housing. [Financial Times article here]
Have you seen our recently live Greater Manchester loan?
We also have some Loan Parts available for the Bristol loan on our Resale Marketplace.
Diversification is a vital component to any savvy investor’s portfolio. But it is important to note that you shouldn’t diversify for the sake of diversification. Doing your own research as to the quality of the loan should still be any Lender’s top priority when it comes to manual loan selection. At Relendex we have an extensive due dilligence process but it is ultimately up to you, the Lender to determine what your risk appetite is.
*If you are not sure of how to allocate your funds, please seek independent professional advice.