Concentrate or diversify?

[Joe Kling]

Hey BP!

For those of you who've gone the out of market route and are investing outside of your general vicinity, let's say for this discussion far enough away to mandate a professional property manager, are you concentrating all of your investing in one market or are you diversifying your portfolio? 

What are the pros and cons of your approach? Economies of scale? Less volatile in terms of both property value as well as general economy of the market? 

What are your thoughts? 

[Dylan W.]

Joe

I largely invest outside of the area I live. I have one property in Sacramento and several properties in Washington State. I have found that concentrating is easier than diversifying. Some reasons for that are in each location where you plan to own, but not self manage, you will need to: hire a property manager; come to understand the neighborhood; conduct market/economic research; etc.... Multiple this by several markets, and this can become a chore.

I have also found that for my isolated property it is hard to ever get there to do an inspection. I just can seem to get motivated to drive for 4 hours for a one house inspection. In my other market, I generally fly there once or so per year and schedule a day to ride around with my property manager and visit my 7 properties. It is simply easier to get motivated to go where I have the more concentrated interest.

Of course concentrating exposes you to more local market risk and less diversification. At least to start I wouldn't worry about that and would just focus in one market. Once you have established a decent portfolio, I might consider multiple markets, but take the time to set up a strong network you can rely on in your concentrated market before branching out.

Good luck