Market diversification - too many eggs in one basket?

Question

Hello all!

I'm struggling with a location dilemma, and my husband suggested I ask "that real estate website I'm always reading" - so here goes!

I currently have 5 properties in Kansas City, and 8 in Dayton, OH.  I live just south of Dayton, but am new to the area (almost 1 year now).  I'm ready to buy more, but am worried about getting too heavily invested in one city.  Is that a silly concern?  The area is stable, at least I think it is, and I'm buying in good, solid A/B neighborhoods.

What do most of you do?  Spread it around, or keep it local?  I know this market, and I know I can continue to make money here, but just as I wouldn't own only one stock, I feel uneasy about owning real estate in mostly one city.  That may not be a good comparison because a city can't really fail as spectacularly as a company' stock, but you get the idea.  As I'm transitioning from doing this as a hobby to making some serious money, I'm trying to make sure I do it the right way (if there is any "right" way).

I appreciate any input that you all  have to give.  Hopefully I'm just overthinking this, and will keep buying here.  But, I'm not opposed to branching out, and there are other good markets relatively close to me (Indianapolis, Cincinnati, Cleveland, etc.)

Mike Dymski · Answer

Diversify when you don't have knowledge...specialize when you do.

Andrew Syrios · Answer

Diversification is nice, but a much bigger risk is property management. It's a lot harder to manage out-of-state and a lot more can go wrong. So I would focus more on investing locally. You can even sort-of diversify locally by buying in different areas in the city you live in if you so choose.

James Wise · Answer

I see no reason why investing in 3 similar markets is necessary. If you want to diversify I would do so by going after a totally different market. Like a high growth market in the south as opposed to more Midwestern cash flow markets. You've already go the benefits of the Midwestern cash flow market right where your at. If that's what you are going for keep building up an economy of scale where you've already planted your flag.

George Pauley · Answer

I think diversification is one of those words that means different things to different people.  You could diversify by branching out into commercial, multi-family, agriculture etc while staying in the same geographical area.  To date my diversification has focused on dominant industry in an area.  For example, one city I'm in is dominated by transportation, another by a military base.  I'm basically trying to tap different economic sectors.  I know folks who invest out of country chasing tax advantages.  If you can concretely state what risk you are trying to mitigate, I think the if, when, where, and how of diversification becomes self-evident?

Gordon Starr · Answer

Krystal, I recommend you diversify to a different asset class Say, buy in downtown proper c/b class neighborhoods. Buy hardened littler homes surrounded by similar solid places. That is where the appreciation is happening fastest. Seriously, south of town is pricey for rentals and the returns are ho-hum  by comparison.

Randa Lake · Answer

Hi @Krystal Baker, this is not a silly question! We have 120 units mostly in Columbus, Ohio and have a few within 1 hour of Columbus (Dayton and Heath). It has been challenging to manage those properties outside of Columbus ourselves. We haven't found another PM company who does business and handles tenants the way we do. Personally, I think you should hold properties where you, yourself, can check in on them. Good Luck!

Nick Heil · Answer

Hi Krystal,

Congrats on getting to the number of units you have already, that is awesome!

In my opinion, I don't think you have to be worried about diversification by city at this point. For example, if you read the annual report of American Homes 4 Rent, the largest single family public REIT in the country, you will notice in the management discussion and analysis section that they mention they don't reach scale until they own hundreds or even thousands of units in one given city. Now, they are invested in many cities across the U.S., but my point is they are buying a lot of units in every city they enter.

I'm not saying you should ignore diversification, it should definitely be a point of concern as you scale, but I think you could acquire many more units in each market before you need to be concerned about diversification.

Good Luck!

Mark Nickoson · Answer

Krystal,

I've lived in Dayton over 50 years.  South of Dayton is where the growth is.  But not every neighborhood south of Dayton is good for investing.  You have to know the areas that are good for rental and there are some.  If you want to chat on the phone, send me a message and I'll give you my cell #.

Mark

Mike D'Arrigo · Answer

@Krystal Baker I don't know Dayton but I know the Kansas City market well. KC has very strong economic and demographic fundamentals such as job growth, population growth, diverse industries etc. that continue to make it a strong market in my opinion. I don't see any local level risk that is going to impact Kansas City negatively in a major way. Any risk that I see is at a macro economic level. Economies move in cycles so if interest rates rise exorbitantly or there is a major global economic downturn, that will effect all markets. Personally, I think that going out of your market that you know and are established in can be more risky. There's a lot involved in learning and understanding a market and establishing a trusted and reliable team in that new market.

Hai Loc · Answer

First off all I cannot believe you totally missed out on Columbus.. you mentioned Indy, Cle and Cincy..

You have the right mindset already so just expand on it.. different markets close by and asset classes A/B.. .

Choose different markets that have room to grow in median price compared to 2007 or stable market that are not volatile to have huge buyer or seller market swings. Expanding also includes building new teams abroad so that would be up to the investor to take on that task.

Diversify in other asset classes whether being A/B or investment types like Short Term rental, self storage, mobile home parks or even building and development.

Sometimes its hard when you built a trustworthy and reliable team to not continually using them but you can always use them in different assets classes and investment types in the same general area for a good size of your portfolio.

You live in a nice spot as Cincy and Columbus are only an 1 hour away but those markets are pretty hot right now.. and Indy has always been known for a solid rental market..

Market diversification - too many eggs in one basket?

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