What does diversification look like for real estate investors?

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What does diversification look like for real estate investors?

Jess White
Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
We hear so much about how we should Diversify our money and portfolios. Yet most of us here on BP beat to a different drum. We don’t depend solely on a work 401k or pension plan to be our saving grace when we are 65. We take our retirements into our own hands, and most of us don’t depend on Government to take care of us. This all being said, what the heck does being diversified look like for Real Estate investors like ourselves? What are you doing to stay diversified, or are you even diversified at all? This is a big question, so I’d love to hear various sides on this. Thanks everybody, I love having the opportunity to have conversations like this with smart people like you!
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Frank Wong
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y

Well, Warren Buffet said “Diversification is a protection against ignorance," "It makes very little sense for those who know what they’re doing.”

I agree with what Warren says.  I think when it comes down to real estate and diversification it's more important to be properly leveraged and have the proper reserves to withstand different economic conditions than to be diversified.  If you are properly leveraged it doesn't matter if you have all SFRs or multi-units.

I also don't think an investor should have properties all over the country. Example homes in Seattle, Houston, Memphis, and Florida.  Pick 1 or 2 and stick with it.  That's a lot of areas and time to divert your attention away. 

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  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Jess White I think your question is a great one and one that should be asked by every real estate investor. 

    Some of the best information I receive on a weekly basis comes from a podcast that @Mindy Jensen and @Scott Trench do on a weekly basis.  You may have heard of this show called The Money Show. :)

    https://www.biggerpockets.com/moneyshow 

    But honestly, if you've diversified in a 401K, Roth IRA, bonds, real estate that cash flows, real estate that appreciates and real estate notes, I think you're in a good position going forward.

    Real estate diversification also means you are in multi family, commercial and REIT's if you're able to invest in these additional avenues.

    2Reply
  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    7y

    This is tough, because it is really easy to lose focus as well... chasing shiny objects, etc.  Even passive investing requires a great deal of learning and due diligence.

    0Reply
  • Michael Doherty
    Real Estate Agent · West Hartford, CT · Member since 2016 · 449 posts · 476 votes
    7y

    A colleague and friend wrote a white paper on this exact topic called, 'Diversification Means Always Having To Say You’re Sorry.' The premise of the paper is very basic, don't put all your eggs in one basket and while it sounds very simple and rudimentary, most investors are not diversified. 

    Being truly diversified means that there almost always will be a part of your portfolio that is under performing. And if every piece of your portfolio... stocks, bonds, Real estate, commodities ect. are all performing, then you are either a genius, lucky or just not properly diversified. 

    1Reply
  • Javier D.
    Investor · FL · Member since 2017 · 266 posts · 220 votes
    7y

    @Jess White

    1/1s 2/1s 3/2s

    Diversified.

    1Reply
  • Raul R.
    Rental Property Investor · New York City, NY · Member since 2017 · 493 posts · 386 votes
    7y

    @Jess White

    For me diversification in RE means investing in different markets that are independent from each other..

    I currently invest in SE came very close in entering a new market in Midwest I decided it wasn’t the right time for me to start hoping to enter the MW soon if not this year maybe next..

    0Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Daniel Reyes I couldn’t agree more, I think it really does depend on your risk profile and overall goals as an investor. Thanks for the answer!
    0Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Steve Vaughan Zig while others Zag is great. I think that’s really what separates a lot of us here on BP from the masses. We aren’t “normal” and far from status quo.
    1Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @John Hunter I guess it really boils down to the question, can you be diversified within real estate and only invest in real estate and nothing else. I think the conclusion I’m coming to is that just owning real estate and no other investment, doesn’t mean you are improperly diversified. You can be incredibly diversified solely owning real estate, but doing so in several different facets within REI. Example: owning in different markets geographically, tenants that work in different industries, having multi family, single family, REITs, private lending to investors, vacation rentals, areas of high cap rates, areas of low cap rates, ETC.
    1Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Ruel K. I hear ya Ruel. It’s such an incredible age we live in. The answers are there, we just have to educate ourselves and take action. I agree BP is an amazing resource.
    1Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Michael Tripp I have been eating up the BP money podcast with @Mindy Jensen and @Scott Trench. It’s incredible how many resources we have as investors. We really have no excuses but to completely crush it on everything we do. I am currently diversifying with both my wife and my own 401k and Roth. We both do 100% of the IRS max on those as well as the max Roth. I know some folks disagree with the 401k and what not, but to me it’s one more thing to add to my list of diversification along with real estate. Plus I live in the lovely state of California and the taxes are brutal on a dual income family. Thanks for the reply Michael. I’ve really loved hearing all the different perspectives.
    2Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Michael Doherty love that. Something will always be under performing. Great reminder.
    0Reply
  • Dustin Twin
    Northern Alberta · Member since 2018 · 4 posts · 1 vote
    7y

    A lot of real estate investors like cash flow and a lot of people get into real estate to free up time and create the wealth to spend that time as you'd like.  I think dividend paying stocks fit well in that strategy and can give you some of the protection that diversity is supposed to.  An easy and relatively safe and conservative way is to buy dividend focused ETF's.  

    1Reply
  • Mike LambertPro Member
    Investor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    Diversification for real estate investors in a few words: invest in other countries! It makes even more sense today as the US market shows more and more signs of weakening and has reached bubble-like levels in many if not all of the most popular markets. After years of loose monetary policy, financial conditions have started to tighten again. Better be prepared than sorry!

    1Reply
  • Brian Wilson
    Investor · Longmont, CO · Member since 2016 · 185 posts · 156 votes
    7y

    @Ian Ippolito

    Can you explain what you mean by the portion of your post quoted below?

    "The different strategies are (in order of risk) core, core plus, value added and opportunistic (ground up development). If you follow a core/satellite approach to diversification, you’ll put most in your core as conservative allocation, and a smaller satellite portion with more risk." 

    Value add I'm familiar with but core, core plus, and opportunistic (I'm assuming you mean land development on this one) I haven't heard before.

    Thanks in advance!

    0Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Brian Wilson, Sure. 

    Core is the safest but also the lowest yielding. Typically core properties are in superior locations in areas that have  superior safety like economic diversification, job growth, etc.. The property is already in great shape and doesn't require much or any improvement (which takes away the execution risk of doing that). These are properties that throw off lots of reliable income but don't appreciate much in value. For example: a prime office building in a prime downtown area. Leverage is typically very low on these: about 20%.

    Core plus is similar to core, but not quite as prime. Maybe it's in a slightly less desirable area or maybe it needs a little bit of improvement (so it has a tiny bit more execution risk). So these tend to yield more than core, with a little bit more risk. Leverage is a little higher on these: typically about 40 to 50%.

    Value-added, you're already familiar with. It yields more than core plus, in exchange for the execution risk of planning to improve the property increase the rent. Leverage is typically about 65 to 75%.

    Opportunistic is the highest projected yield but also the riskiest. This includes all types of construction. There's lots of things that can potentially go wrong, from overrunning budgets, to having trouble with permits, to finding that there is an endangered species on the property that prevents you from building at all. Leverage is the highest here and is often over 75%. This has the highest execution risk and in exchange has the highest projected yield.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y

    There are some great responses in this thread, especially from @Frank Wong @Steve Vaughan and @Joe Splitrock. Like them, I tend to diversify my real estate holdings with investments outside of real estate, like the stock market. I’ve also recently got into the lending side of real estate to further diversify. 

    I also don’t think you need to hold real estate in markets all across the country to be diversified, or that it’s even necessarily a good idea to do so. If you don’t have the proper teams and systems in place to manage those holdings, it can actually end up creating inefficiencies and magnifying small problems into large ones. 

    Ask yourself what’s better, 1 house each in 5 separate remote markets that you know reasonably well, or 5 houses in one local market that you know really well? While there’s no one perfect answer for everyone, we’ve all read the stories on here from members investing from afar and the most minor problem turns into a huge problem because they’re just too far away to deal with it. 

    Anyway, just my two cents and something to think about. 

    2Reply
  • Matt Millard
    Lewisville, TX · Member since 2015 · 344 posts · 264 votes
    7y

    I diversify by investing in mobile home parks, multifamily, owner finance, rentals/flips & silver/crypto.

    I’m completely against the stock market & always will be. Just look at 2008 & December!

    0Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y
    Originally posted by @Matt Millard:

    I diversify by investing in mobile home parks, multifamily, owner finance, rentals/flips & silver/crypto.

    I’m completely against the stock market & always will be. Just look at 2008 & December!

    If you just pick one or two points in time, you’d be against investing in anything, real estate and crypto included. 

    4Reply
  • Alpesh Parmar
    Investor · Dublin, CA · Member since 2016 · 344 posts · 228 votes
    7y

    @Jess White I have SFRs, MF, invested with syndicators in MF, self storage and MHP deals plus bought some notes and a small parcel of coffee farm in Panama. I also have invested 401K funds in some stocks as well as crypto-currencies.

    I know I still need diversify even more.

    0Reply
  • Brian Wilson
    Investor · Longmont, CO · Member since 2016 · 185 posts · 156 votes
    7y

    @Ian Ippolito


    Okay that all makes more sense now. 


    Though, I'm still a little confused by how you associate leverage with each category. For example, if you have a core level 4-plex in San Diego worth 800k. Investor has plenty of capital but decides to use leverage so they put down 25-30% and rent it out. Still a core asset, just leveraged. Or, is the leverage in relation to return an additional factor that determines it's category?

    0Reply
  • Matthew McNeil
    Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
    7y

    You should avoid diversifying within one industry or economic sector such as RE - as if that's the only sector you're invested.  As the wisest man who ever lived said; "Divide your portion among 7 or even 8."  He wasn't referring to 8 properties.  Also, prioritize keeping some reserves, and make sure you have an emergency fund.  Cheers!

    2Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Brian Wilson, yes exactly. If you take an otherwise core property but put, say 40% leverage on it, it’s no longer a core strategy investment and more like core plus.

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  • Matt Millard
    Lewisville, TX · Member since 2015 · 344 posts · 264 votes
    7y

    @Kyle J.

    You’re only correct to a point. What matters like Buffet’s old perspective is getting the highest return with the lowest volatility & stock market is massive uncontrolled volatility you can’t effect or change!

    0Reply
  • Mike Krieg
    Investor / Syndicator · Austin, TX · Member since 2015 · 367 posts · 220 votes
    7y

    Diversification to me in RE means different sponsors, asset classes, like self storage, mobile home parks, and different markets. Also, I like having a mix of Class B, and C (strong value add deals) and Core holdings. After that I'm looking at other markets. I've made money in the Russian real estate market, and Mexico, but these days I would look to other places.

    0Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y
    Originally posted by @Matt Millard:

    I diversify by investing in mobile home parks, multifamily, owner finance, rentals/flips & silver/crypto.

    I’m completely against the stock market & always will be. Just look at 2008 & December!

    For me, the 2008 meltdown was a gift of a lifetime from Mr. Market. The stocks in my Traditional IRA had fallen 50% in price, which meant I could convert the portfolio to a Roth IRA for 50 cents on the dollar in terms of the taxes I had to pay (such a conversion is a taxable event). I believed the companies represented by those stocks retained their intrinsic value and were now on sale. For value investors, price is what you pay and value is what you get. If you like a stock at $40 a share, you'll love it at $30 a share (if you believe the company is still fundamentally sound) and will want to buy more shares if you have the cash on hand to do so.

    Real estate investing is the same way. If you like a particular property at 80% FMV, you'll love it at 70% FMV. The asking price from motivated sellers can be a gift when you can find these bargains.

    0Reply
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