BiggerPockets

In my opinion, you should start diversifying geographically when you hit 15-20 properties. The US is large enough that there is no need to diversify internationally. Unless your city is totally dependent upon one employer, then I think this is a good number. Having all your houses in one market is akin to having all your money in one specific stock.

One example I use often is the investors that had over 50 properties in New Orleans a few years ago. Right now we can help people with the Memphis/NW Mississippi area, but it is my goal to provide our investors opportunities in St Louis and Oklahoma City in the next two years.

Rich it is just simple diversification. If you have all of your properties in one market, then you are subject to any downturns in the local market that range from a simple loss of employer to major natural disasters such as earthquakes or hurricanes.

Diversification is a conservative approach, but if you have everything in one market and disaster strikes, then it can be a problem.

I am in Memphis and believe it or not this is an earthquake zone. What happens if I own 70 houses in Memphis and the New Madrid fault has a quake like happened in the 1800s?

If that happens I would rather only lose a percentage of my real estate portfolio than all of it and possibly my regular source of income as well.

Now if nothing happens in your area, then there was no need to diversify, but I can't predict the future. Hopefully everything works out in your area, but I am probably more conservative in my investment strategy.

Diversification is a huge consideration in stock/mutual fund investing, but hardly given any consideration in real estate investing. I personally hadn't given it much thought, but I did after talking to Katrina refugees who were landlords in New Orleans.

I am not a big believer in diversification. I tend to side with Mr Buffet on this topic. Diversification is for investors who don't really know what they are doing and need diversification for safety.

If I find an area where I continually dominate and rake in massive returns, I am going to throw everything I have at that and not buy in other areas simply to "diversify"

Of course it all comes down to persoanl preference and each individuals tolerance of risk coupled with their own comfort zones.

I am, by no means stating that some should not diversify, as some people need to, just that one should not do it simply to do it.

Like I stated, diversification is done to "reduce risk" but reducing or even eliminating risk can be done in more ways than just diversifying.

Another way to spread out the risk is via group investing: partnerships, JVs, TICs (N/A in some cases), or syndicates. I prefer syndicates.

Will,

That's exactly my point. Although the amount of risk for a particular opportunity doesn't change, one's percentage of exposure to that risk does lessen with group participation. That's not to infer or imply that each participant will share the exposure to that risk equitably.

Every opportunity has a linear combination of risks and rewards. Ealier you stated, "Diversification is for investors who don't really know what they are doing and need diversification for safety." I agree, and I'll go a step further. I believe a lot of investors are ignorant, lazy, and/or apathetic. I believe that many of them (mis)use diversification as an alternative for digging into the fundamentals for each opportunity. I view their form of diversification as playing a round of Yahtzee: rolling multiple dice.

Investing, farming, and gambling all share something in common: they all involve playing games with numbers. I view farming and gambling as opposite extremes of a spectrum. The less an investor knows about the underlying fundamentals of a particular investment, the more s/he is gambling. Similarly, the more s/he knows about those fundamentals, the more s/he is farming. Farmers know what to plant, where to plant it, how to nurture it, and when to harvest it. Farmers also know (or learn) that it's unwise to only plant a single seed, and to expect a bountiful harvest. I believe investors should do something similar.

One example I use often is the investors that had over 50 properties in New Orleans a few years ago. Right now we can help people with the Memphis/NW Mississippi area, but it is my goal to provide our investors opportunities in St Louis and Oklahoma City in the next two years.

Someone mentioned Warren Buffet. He lost around Twenty BILLION dollars last year. Maybe now he wishes he had diversified a little more. He invested nearly a Billion in GE at 32 and it dropped to 5, and is now around 12. He invested in Wells Fargo at 40 and it dropped to 7, now around 25.

Diversification is a GOOD thing, and sometimes, it only needs to be 10 miles. Look at Orange County, CA and compare Newport Beach to Garden Grove.

Twenty years ago, my father bought 15 properties in the Fresno, CA area. UGGG. What a mistake! He would have been better off buying 3 in Fresno, 3 in Modesto, 3 in the Inland Empire, 3 in Orange County and 3 in San Diego! I am still cleaning that mess up today, down to 10 in the Fresno area.

Nationwide, if you are going to use the argument, "he loses nothing unless he sells" then you also have to say "he has not gained anything unless he sells" as well. Last time I checked, Forbes assesses a person's VALUE by the value of what they hold.

Also, I am not sure I agree with your assessment of GE. There was a time that folks said the same thing about GM and AIG and Bear Stearns and Enron, etc....

Although not directly correlated, my experience has shown that when property values drop, my vacancy rate goes up. Two years ago, the 10 properties in the Fresno area were fully rented, but today, six are vacant. So we are trying to rent them, and quite a bit less than just two years ago. Therefore, when property values drop, so does rental income.

There is the theoretical side and then there is the reality side. CASH FLOW IS KING. Every formula, every 'abbreviated' investment term, EVERYTHING, hinges on the CASH FLOW. When cash flow is zero, none of the formula's work.

But to get back to the original question, diversity is a good thing.

As a side note, I took over my parent's properties because dad is in the advanced stages of Alzheimer's. That is one WICKED disease.

Actually, it is "give me a break", not "give me a brake", unless you are stopping a vehicle.

Actually, I am considering purchasing some GE stock. But not until they get rid of Jeffrey Immelt. What a joke. Who put him in charge of GE? Instead of running GE for the Stockholders, he is running GE for the Democrats, which is why Obama appointed him as a member of President's Economic Recovery Advisory Board. GE stock was around 33 when Immelt took over, and dove down to 5. Yep, a real winner!