Diversification.... needed or not?

Question

Hi everyone! As a financial advisor having a diversified portfolio is essential. Is that the same with real estate investing or is there actually more risk because you will have a difficult time learning and exploiting a niche if you try and diversify? Do people diversify between single family, multi-family, appreciation investments, cash flow investments, coastal properties, midwestern properties etc...

I am a newb but own a primary residence (in San Diego) and one rental in AZ which are both more appreciation plays and I've been looking at small multi-family and middle America cashflow properties.

Thanks in advance!

I am a newb but own a primary residence (in San Diego) and one rental in AZ which are both more appreciation plays and I've been looking at small multi-family and middle America cashflow properties.

Thanks in advance!

Rob Hakes · Answer

@Adam Bileckyj

I think some people diversify just for sake of diversity.  Think of what Warren Buffet meant when he said "diversification is protection against ignorance. It makes little sense if you know what you are doing." I think in the stock market game diversification is good because there is so much left up to the whims of the day on Wall Street.  Not as much with REI.

If you started to diversify in REI right off the bat, you may be shooting yourself in the foot.  Each asset class in RE takes years to learn the ins and outs.

Learn what works well for you and stick to it..............unless you find something that works even better.  Because there are so many good ways to invest in Real Estate, i think that diversification happens naturally as you seek better ways to apply your capital and stick to what works.

just my two cents.

James Wise · Answer

Age old debate diversify vs economy of scale. I think it's smart to get a bit of both. If you've only got the funds to buy 5 single family homes I don't think it's wise to be in 5 markets. However if you're able to buy 500 single family homes you'll want to diversify that out to help ride out downswings in a particular market.

David Zheng · Answer

I think it depends. You might be really good at your own city and killing it. I don't necessarily think you need to branch out and hit other places, cause lets be honest there's probably going to be "you's" that know more and are killing it in THAT city. I don't think focusing on a niche is a bad thing. also you get to stick to what you know and have an absolute advantage in those places.

However, if you enjoy learning and exploring other business ventures, it doesn't hurt to branch out. Personally money comes a lot easier if I focus on my area, but I see why people invest everywhere too.

Clayton Mobley · Answer

As for your next steps, if you're going to go out of state (pretty common for CA investors) you'll need to decide how you want to tackle that. Turnkey or a more DIY (build your own team of agent, contractors, PM etc) can both work, it just depends on your wants and needs regarding time investment and control. If you're looking into MFRs, you may need to go the DIY route as that is not as common an asset type for Turnkey providers (mostly SFR). More moving parts and more due diligence (vetting multiple team members rather than just one provider) but it may be the best route for duplex and triplex investments. Again, I agree you should stick to higher class props, but B/B+ is better than A for cash flow.

The next step would be to do some research on markets that have a strong rental market with numbers that add up for you (I guess if you haven't determined what those numbers should look like that will actually be Step 1). Then if you're still focused on MFRs, narrow by those that have strong rental demand for that type of property, decide on Turnkey vs DIY, and start doing your due diligence. I always recommend that OOS investors make the trip out to meet the folks they are thinking of working with (whether Turnkey or DIY, the point still stands) once they've got a shortlist of 1-2 teams/providers. A few hundred bucks is a small investment in your investment, and making the trip will allow you to see some of their handiwork, tour neighborhoods, and get a feel for who these people are that will be responsible for making your investment a success.

If you have any questions about the turnkey model or the Birmingham, AL market, feel free to reach out any time.

Good luck!

Clayton Mobley · Answer

@Adam Bileckyj I agree that diversification in any asset class is a good thing, but not something you can really accomplish all at once with REI. Many people who have been in REI for a good while have several different types of investments - SFR, MFR, syndicates, notes - but none of them started in all those niches all at once. Same with geography. Depending on the market, it's absolutely fine to have 5, 10, even more props in one place (though different neighborhoods are advised) but you certainly don't need to be tied down to one locale.

If you already have an appreciation property but think cash flow is a good next step for you, then the midwest and south are the go-to regions for props in the B-class and above with reasonable prices. I agree that sticking to a higher class prop is best - esp for a new investor moving into a market they don't live in - but I would say stick to the B/B+ class. A -class props are better for appreciation plays, as the PITI payments almost always demolish any potential cash flow.

Casandra M. · Answer

Diversification is our motto when it comes to our income, and we try to incorporate that in our real estate investments as well.I personally think diversification is undervalued and not taught or applied enough when talking about concepts outside of retirement accounts, which is a shame.

We have single family and multi family properties located in different areas of our city and in the near future, will most likely have properties in multiple cities and states. We have only been doing this for a few years now, but when it comes to our rentals and our goals for future properties, we think about diversification in type of property and how they are obtained: neighborhood class, cities, states, turnkey vs BRRR possibilities, BRRR vs flip, tax liens & tax deeds, foreclosure vs auctions, etc....

Remember that diversification in income brings diversification in learning as well. We've learned invaluable lessons from purchasing different types of properties and being willing to take on different type of rehab projects.

Ian Tudor · Answer

@Adam Bileckyj - Depends on how much money you are looking to allocate. Large money managers usually try the diversification strategy to get certain exposure to trends. As an investor and operator, I've always found that you will find better deals staying in one place longer. In other words, going an inch wide and a mile deep is a way better use of time than the opposite. Deals are hard to come by these days so highly focused bets are easier to monetize.

Andrew Angerer · Answer

I think Hai Loc answered very well, I would agree that this should be done over time. Many of the bigger pockets podcasts have mentioned that you should focus on one type of property class, when starting out. But once you have mastered that one type, or at least have one under your belt be sure to move on.

Also consider your goals, and your tolerance for risk/reward. This will influence what you invest in, probably something you have already done as a financial adviser.

Best of luck Adam!

Dennis M. · Answer

I focus - follow one coarse until successful -

I buy multifamily apartment houses and fix them up . I have no interest in putting some eggs in a bunch of baskets . I have no interest in single family homes or stocks especially lately with the market going wonky

All my diverse friends are not too happy right now so I’ll just keep plugging away with what works for me

Diversification.... needed or not?

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