Is geographic diversity a plus or better to have investments close by?

Question

I make the best decisions for my situation when I have information, but I am struggling with something I don't have enough information about. I hope this makes sense.

Right now I own three real estate properties, each bought intentionally for my use for reasons, in three different states, two single family and one three family. For example, my other work was taking me to Worcester, MA regularly from upstate NY, and I kept finding it difficult to find a place to stay with two dogs. Three years of trying! After I decided to buy a property (my third), I decided a multifamily was best, and to rent out two floors to pay for it.

I purchased real estate other times for excellent reasons, and now I am trying to decide what to do about the first two places and what role geographic diversity has in my decisions when I personally do not need the properties anymore. Rent or sell?

I will be asked about the numbers, but the numbers are attractive enough on the face of it to rent one, and a close call on the other, if they were both down the road from me here in Worcester. I just keep picturing the loop, from Worcester, to eastern upstate NY to southwest VT, then the loop back to eastern upstate NY and back to Worcester (there is no better direct road from SW VT to Worcester) to check on property -- and I cannot decide if it's a good life. I can do it, and most of the year it's beautiful. (FYI, I have to see property and cannot manage it on the phone.)

But I picture what else I would be doing if I wasn't doing that. Would it be better to sell both properties and buy another property in Worcester solely for investment? Or is it a bad idea to own two old 3 families in Worcester with ancient sewer systems?

Does anyone have any stories, insight or data to share about whether there is a benefit to be diversified in location? I need to understand it better.

Thanks for reading this wordy post.

Kate B. · Answer

Update. I decided to sell the house in NY, first fixing it up with the carpenter from my new home in Worcester. Since the NY house is where all my family is, I will see how life goes and what I can do with day trips, and build on that. (Need overnight? How often?...) I will try to sell the VT house at a reasonable price but I do not have to sell and will only sell at an excellent price. If it's still mine after a period of trying to sell, I'll rent it. The VT house is unusual. Without making any effort to sell, three people have asked me about buying it.

Ndy Onyido · Answer

Thanks all for the life experience and success stories. I learn every. I am currently reading a book by John W. Schauab-'Building Wealth One House At a Time' and he advised geographical diversification to contain risks due to variability in economic situation.....kind of makes sense as markets may not all be good or bad at the same time......one may compensate for the other. The only caveat I see here is that the volume must justify the numbers for a long distance investor since managament fees have to be accounted for.......just my thoughts

Kate B. · Answer

Steve, those are excellent points. But I have a funny story to share. It took me awhile to find a carpenter. I heard who NOT to call. Finally found my guy for the 3 family in Worcester, and the stores to get supplies. Guess what I learned just by asking a question. He is willing to work on BOTH of my other properties, in NY and VT, because his second home is between them and he used to live blocks from one of my properties. So, right there I have a flexible member of my team, and he told me who to call in my NY area for reliable reasonably priced electrical work, because he used to work with him. I'm sensing my areas are not so far apart, and that with my small number of properties it could be reasonable to try and see if it works since I already own them. I have a hunch I'll sell them in 5 to 7 years even if it works but the easier course is to try it out first. It helps to think it through.

Steve L. · Answer

I think geographical diversity is a bad idea for a small landlord. Local experts can really benefit from discovering inefficiencies in the market and capitalizing on them.

- I know what Cities are best to deal with

- What management companies are the best. What trades are the best.

- In 2009, land was valued at almost 0 I have been able to buy many houses with 1-2 acre lots that have further potential. In the meantime, I can get 10-20% additional rent because of this.

- What neighborhoods are up and coming and what neighborhoods are getting hammered.

I could go on and on.

Kate B. · Answer

Thanks Kimberley! That was really helpful to hear. I was especially struck by your deciding to see how it goes with decisions before making more decisions. This is how I am leaning too. I have enough to learn about the 3 family I bought, so waiting to buy another 3 family feels right. During this time, I can test the waters on making my two other properties (single family homes) rental properties and just see if I like it. Thank you for telling me about your situation.

Kimberly T. · Answer

Ultimately, you have to decide what your goals are with your investments, both long term and short term. I can tell you what my husband and I decided for ourselves, but it may or may not apply to you.

We originally bought a triplex just a few miles from our house as our first investment. This way, we could manage it ourselves and really learn the ins and outs of being landlords (my parents were landlords when I was growing up, so I learned some from that, but it isn't the same as having your own and making the decisions yourself).

We decided after that, that we ultimately do not want to stay in CA long term (plan to be out by about 2019 or 2020). We ended up buying a couple fourplexes in AZ over the next couple years due to the landlord-friendly laws, better ROI, cheaper prices (less money to save up for a down payment), and proximity for us to be able to still drive there to work on some of the major projects (xeriscaping, rehab, etc.).

After researching various areas that we would consider living in the future, we pulled the trigger and bought a fourplex in CO just last month. We aren't committed to moving there yet, but it is a landlord-friendly state, has decent ROI, and is still much cheaper than around here. We will assess how things go with that property and ultimately decide whether or not we want to move there over the next few years.

Our overall goals for buying rentals is to have enough cash flow that we can quit working and live off that income, as my parents did years ago. We will sell our CA triplex before we move so that we are no longer exposed to the anti-business climate here, but plan to keep rentals in both AZ and CO, and are still considering investing in other landlord-friendly states as well. We like the idea that if one metro area has a problem (natural disaster, economic slump, etc.), we don't have all our investments exposed to it.

So, those are our reasons for buying where/when we did. You have to decide what you're trying to accomplish, then set out on a path to accomplish it. Good luck!

Is geographic diversity a plus or better to have investments close by?

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