Concentrate or diversify?

6 Replies

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? 

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

Originally posted by @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

 Hey Dylan

Great advice. Thanks. 

These points were among the lines I was thinking. I like your plan of action, though, to concentrate and then diversify. Makes a lot of sense. 

I was reading a post on the topic of Turnkey Provider reviews in which @ali Boone suggested that a lot of passive investors (the ones who use the providers to invest out of market) use BP for their purchase and then leave BP because they're done with the active research part of their investing. So I appreciate you being on the site and weighing in.

@Joe Kling

If you are not buying from a TurnKey Provider, then my advice would be to concentrate.  You have no idea how hard it is to control a PM when you only have a few properties with them.  I would say over half the properties I buy are from failed out of state investors.  I talk to them all the time and their vacancy and repair costs being so high are because they have no control over the situation.  

I mention TK companies because they already have the scale and control with PM and want repeat business so they work harder at making sure you are taken care of.  

Originally posted by @Brie Schmidt :

@Joe Kling

If you are not buying from a TurnKey Provider, then my advice would be to concentrate.  You have no idea how hard it is to control a PM when you only have a few properties with them.  I would say over half the properties I buy are from failed out of state investors.  I talk to them all the time and their vacancy and repair costs being so high are because they have no control over the situation.  

I mention TK companies because they already have the scale and control with PM and want repeat business so they work harder at making sure you are taken care of.  

 Thanks Brie

I'll check out your website. I'm concerned about those lack of control issues even with buying TK. I've heard some TK owners being less than enthusiastic about the responsiveness of their management companies. I was speaking with @Aristotle Kumpis about a network that brings TK purchasers together to place pressure on the TKs which in turn places pressure on the management companies. That might help. I'll check out your site too because I don't want to be frustrated and unsuccessful. 

There are other ways to diversify other than owning properties in various locations. For example, you can buy different home types (SFR, multi-family, apartments) or you can buy units in various property classification types (A,B,C). You can even diversify your RE strategy by wholesaling, flipping and also doing buy and hold deals.

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