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!
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.
Though I have been accused of coming up short in the diversification category (my brother, an accountant, says my idea of diversification is buying rental properties in different areas of Jacksonville) I'll pose a thought that I think is a bit counter-intuitive for this thread.
Buy what you know.
I know residential real estate in Northeast Florida, therefore that's what I buy. I have some money stashed in a self-directed IRA that has various ETF's in it. But at the end of the day, my leverage point is in finding/purchasing/managing SFH for the long run.
Example 1. A couple of years ago I thought about directing funds at one of the crowdfunding real estate websites. One of the first few deals I was looking in to was in Jacksonville (where I live). The sponsor happened to be an individual that I had heard was under some sort of FBI investigation (this came out publicly last year) for embezzling funds in the commercial/MF real estate realm. My thought - if I knew that and this website didn't pick up on it in their underwriting, maybe I should be cautious of other deals too.
Example 2. Even though I have a degree in finance, I have NO IDEA what I'm doing in the world of stocks/bonds etc. Sure I know what a P/E ratio is and have a base level understanding of a company after looking at their P&L and balance sheet. But there are people with literal PHD's doing analysis on these same companies every day. I can't compete!
Hope this helps those who think that investing can be scary. It doesn't have to be. Find what you know/like and keep getting better at that thing!
@Jeff Riber - Great post! I agree, it seems that if "Wall Street" wants to take the market down today, it goes down, sometimes for stupid reasons, but then it goes up for the same stupid reasons, so you really wonder if its not a big racket? One day you're up, the next they decide to take your money from you.
But with real estate, you can get a nice 3% appreciation, maybe more some years, and you can raise rents every year too. Its a great investment for your life and that of the family. You can try your hand at flipping, or lease option, or straight up rentals. There are always 40-45% of Americans who want/need to live in someone else's property. Its a great "business" to be in for all your life.
The more people you meet, the more opportunities you have and there are lots of people bored to earn 1% on their money, so ask people if they would be interested in say 6-9% on their money in first position for a real estate deal. the worst thing they can say is NO, but you ask enough people, you will find those who want to put their money to work.