When is it time to Diversify?

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

Howdy, wanted to ask the advice of the community here in discovering when the correct time to diversify is as far as real estate investing goes. I'm financially prepared to purchase properties 3 + 4 as things stand (I live in Denver, and will house hack one of them, and buy a regular rental property for the other), and I plan to do this over the next 6 months, my first offers to begin in November. At that point I will have a significant amount of wealth and assets under management in real estate, though of course much of that will be leveraged. As virtually all of my wealth and assets will be tied up in real estate, it seems like if the time to begin diversifying hasn't already come, it will after this next round of purchases.

The problem is that it seems like building wealth in other areas is painfully slow compared to real estate. I'll literally have to save up tremendous amounts of cash and begin plowing them into stocks, for example, and I'm no entrepreneur that's going to build a business while working my day job here at BP. What do other investors do once they've applied their real estate plans for a few years, and have a bit of wealth and a stable cash flowing portfolio.

What's next?

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Matt M.

Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes

10y

Max out your IRA and invest in LOW FEE index funds. You don't need a huge amount as the time value of money will do that for you.

Properties 3-4 already? Is BP hiring???

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Travis Sperr
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
10y
@Scott Trench interesting question - think about this regularly. I too am heavily invested in real estate - both rentals and new construction projects. The more time I spend on the topic the more comfortable I am being so heavily invested. I understand real estate far better than anything else, I can identify and execute on market inefficiencies, force appreciation, increase rents, decrease expenses and get long term fixed rate debt under 5% all while owning hard assets that cashflow. Where else can you get that?
The stock market has performed in the long run but also can be volatile and difficult to understand for me.
So maybe the same answer can be found by asking the question in a different way - you are heavily vested in real estate, what is the worst that can happen? If the market takes a total crap, the stock market likely correlates the same way. Do you have the reserves and right buildings to weather a storm of decreased rents? if so, values are not relevant for a long term buy and hold investor.
I personal am deleveraging by paying down/off some mortgages to curb any fear of being all in.
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Matt M.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
10y
Max out your IRA and invest in LOW FEE index funds. You don't need a huge amount as the time value of money will do that for you.
Properties 3-4 already? Is BP hiring???
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Steve B.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
10y
Building wealth via money in your mattress and cd's was pretty good in 2007-2008 Diversifying your portfolio is used to limit downside. A strong bull market tends to give people amnesia
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Henry J.
Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
10y
Definitely open a Roth IRA. If anything, all earnings will be tax free withdraw when you turn 59.5 (or so). You can always withdraw your contribution tax free after 5(?) years. If you are looking at diversifying through stocks, you can dollar cost average into some vanguard index funds with low fees. Invest monthly or weekly. If you don't like the current market high, then stash extra into a cash reserve. If you know which stock to buy, you can try capital one investing (used to be sharebuilder). Some mutual funds have no load so you can buy through them without paying any commission. There are other low fee trading platforms out there. Compare the prices so you don't end up paying a large % in commission. You can buy gold through some gold fund. I'm not certain of the fees but look at symbol GLD or IAU. They are both gold related fund. Some people may suggest life insurance. That's a sticky topic I'm not familiar with so I will leave that can open for others to chime in. Good luck finding something that works for you. Henry
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Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
10y
@Henry J. is correct on most of the Roth IRA info. @Scott Trench, you'll want to ensure you're within the income limit threshold to make a direct Roth IRA contribution. If you're not, there's a way around it but it gets a tad complicated. You can withdraw CONTRIBUTIONS (not earnings) from a Roth IRA at any time without paying taxes or penalties. When you pull money out of a Roth IRA, it is viewed as contributions first, THEN earnings (with very few exceptions). The downside, of course, is that depending on what you invest in and how those investments perform, you could always end up with less than you started with and you obviously can't withdraw what's not there.
Congrats on properties 3 and 4. I've been stuck in analysis paralysis for years and keep going back and forth on whether or not being a landlord is for me. I recently came across a property nearby that looks like a screaming deal and may change my mind. We'll see.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Personally, I believe you should always have multiple pools out there from which to draw or fund, including (but not limited to): traditional bank accounts for stashing ready cash; some form of IRA; an aggressive (unless you're really old, in which case why do you care ;) ) no-load investment mutual fund; a stock investment account or indexed mutual fund; ETC. Investments are like being on a teeter-totter; when one side goes down, there's something somewhere else that is realizing gains. I like to move cash from the high side to the low side, repeat as necessary. If you hold most things long enough, most everything evens out, so you can just park funds into different areas and probably realize reasonable gains either way - I'm not suggesting you should daily buy & sell stocks, which costs a bunch of money even if you do it the cheap way (I have a Capital One (formerly Sharebuilder) account that I use), but you also don't want to needlessly let investments get wiped out, which can happen with anything - real estate, mutual funds, whatever.
If you have lots of cubbie holes, you always have options. I don't know that I would consider 4 houses a stopping point in real estate, unless you have had your fill of tenants, but if you don't have any other investments or cash parked anywhere else it might be time to at least consider that option.
Remember one thing: most investors get wiped out through lack of liquidity. Markets for everything will always go up and down. If you have all of your assets tied up in real estate, you should have a reasonably full well of cash somewhere else to cover the vacancy caused by riots, the snowstorm damaged roof, or the massive tax hike from your municipality. You *never* want to be in the position of being forced to sell an asset.
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George Wines
Investor · Denver, CO · Member since 2015 · 61 posts · 23 votes
10y
I have to agree with @JD Martin. Liquidity will protect you in a downturn.
If you are chasing yield however, then you would want to buy some sort of asset that goes up when RE or the stock market goes down. In my mind, that is heavy metals and maybe some sort of treasury or muni bond (if you think interest rates wont go up). I disagree with @Henry J. saying to invest in a gold/heavy metal ETF as an ETF will track closer with the market than buying the actual commodity. If you are like myself (and a lot of millenials) though, you dont want to actually safeguard some commodity that can be stolen from you. In that case you could go with a place like the Perth (Australia) Mint that can hold the bullion for you (if you trust that the system wont entirely collapse in the next downturn). I have gold bullion stored there. Pros: no monthly/yearly fees, Cons: Large upfront fee; complicates US taxes since it is an out of US investment (but with a government bank so not as bad as it could be).
Either way, I would recommend liquidity
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
10y
Stay away from the market right now. If you want safe, long-term appreciation and greater retirement income, high cash value life insurance is the way to go. There is principal protection and good growth potential. This is where you put your safe money. Most people don't understand that life insurance is capable of providing 2-3 times the income once you reach retirement age.
These are not the policies that Dave Ramsey, Suze Orman and other pop-culture gurus rail against. That's the typical whole life sold by the majority of agents. In an overfunded policy, the "insurance" component is minimized for the greatest cash accumulation. That also means that the fees and commissions are minimized.
If you want stock market exposure without the risk, then look into an overfunded Indexed Universal Life. It will outperform the average mutual fund over time, provide more retirement income, and you can leverage the cash value every day between now and the day you retire for an extra kicker.
Like you, I have no interest in starting a business while I'm running another business. I am looking for lower risk more passive real estate investments for my leveraged cash value. I like private lending and tax liens because they are much more secure positions than putting equity directly into real estate.
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Anthony Drew Gary
Developer · Indianapolis, IN · Member since 2015 · 57 posts · 12 votes
10y
Scott,
Great question! This really comes down to the level of risk you're comfortable with in all aspects of your life. I still have a W-2 and I can tell you that I follow most of Dave Ramsey's principles - I'm putting 15% of my income into the stock market. Beyond that, I'm buying single family rentals with conventional mortgages putting 20% down. That way, not all of my wealth is in the stock market, yet not all of my wealth is in real estate.
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Scott TrenchPro Member
OP
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y
Thanks for the good advice guys. I have a couple of more points things I'm thinking about:
First, I am not convinced by the argument that some investments go up when others go down. It seems to me that if interest rates go up, then both bonds and real estate values will fall (though rents may go up). Further, stocks have been in a huge bull market, so there's no reason that all these asset classes won't move in lockstep, and I am unconvinced that they truly represent diversity. I really like what @Travis Sperr is doing - it makes sense to me that simply staying well capitalized and paying down debt is as good as diversifying in many respects, especially if that is your area of expertise.
Second, I guess I don't understand this life insurance thing very well. Can you please help me learn more? It seems to me that if I don't have a family or a business depending on me that life insurance is fairly useless. I'd need some math demonstrating that the returns realized by a life insurance policy are statistically more likely to produce greater income in future years than stocks, bonds, real estate, or entrepreneurial pursuits.
As far as IRA's go, I already max a Roth every year, and I contribute significantly (not the max) to a 401(k), so I do have a little diversification there.
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Jesse Danzig
Real Estate Broker · Los Angeles, CA · Member since 2016 · 55 posts · 16 votes
10y
@Scott Trench seems to me like you're already pretty well diversified. as mentioned above, if you have extra money to save/invest, consider continuing to build your cash reserves or pay down existing mortgages. you can also always find a tech company or startup to invest in too.
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Trevor Ewen
Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
10y
@Scott Trench
I definitely have a lot of thoughts on this matter, and before you get too far into choosing where to diversify, I recommend hitting the literature and stocks, ETFs, and Mutual Funds. Here are the three books I recommend:
A Random Walk Down Wall Street - Burton Malkiel
The Intelligent Asset Allocator - William Bernstein
The Intelligent Investor -Benjamin Graham
Real estate investors love the scrappy intuitive nature of managing rentals. Furthermore, the cash-flow is almost always better, so what's not to like?
Diversifying into the public markets is fundamentally a liquidity play. There is great flexibility in the public market, and that is not to be discounted. My first two down-payments came out of returns from the market. It's very hard to go the reverse. Selling a home takes time, energy, and a good degree of circumstance.
Managing properties takes a lot of work in general. Passive, diversified investing is the lowest amount of effort you can put in for return.
I do a 50/50 split. I have as much cash invested in the market as real estate (roughly speaking). This requires a ton of buying discipline on my part, and if I have had a big real-estate year, it's usually followed by a quiet one. This is something you will want to set for yourself, and try to stick to your allocation, so you're not just going where the wind blows.
One final thought. Domestic large-cap stocks are extremely pricey right now. My hunch is we're at the top of the market. Much like Denver, Seattle, NY, LA, and SF, there's probably a bit of market cooling to follow. Foreign large caps, foreign small caps, and energy-related equities are still at a good price range these days. No matter what, buy & hold. Same as a rental, you stay for the long-term, and you look like a genius.
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John Wanberg
Aurora, CO · Member since 2016 · 30 posts · 7 votes
10y
@Thomas Rutkowski, the high cash value life insurance is a pretty fascinating vehicle that most people don't explore. I bought a pretty sizable policy after my wife and I had major health issues, which made a conventional term policy overly expensive. It provides an interesting blend of benefits: life insurance to hedge against your death (only relevant if you have family), a cash value that you can borrow against (and is guaranteed never to go down, despite market downturns...so you can hop in during a down market with your own private funding mechanism!), and return on your investment (good policies can be around 5%).
Because I was young, I started with a over-funded policy that was insurance heavy (NOT what Thomas recommended) to build the payout value and take care of my wife if I die, and will convert my policy in the next year to a insurance light, cash heavy allocation that will become self funding within 10 years through dividends paid on the policy. This strategy let me build up the insurance value early, and then maintain the payout as I switch to using it as a cash reserve. It is not the right vehicle for everyone, but I thought it was pretty compelling.
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Different strategies are for different types of investments. Diversification is for passive investments and concentration is more appropriate for active investments. Real Estate, at least as it pertains to how it is commonly discussed here on BP and what you seem to be referring to, is an active investment. If you are able to create value and use your skills and experience in real estate to manage risk and create outsized gains, which it sounds like you are doing, and you are willing and able to continue doing that, then you should NOT diversify. “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” -Warren Buffet.
If on the other hand you know nothing about REI and have no interest in learning or actively managing your portfolio, then that is a passive investment ... in that case you should buy a basket of REITs and/or a S&P500 index fund and diversify away.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@David Faulkner perfectly said and an important concept. Knowledge and control, in whatever asset class, changes risk-adjusted returns dramatically.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @Scott Trench:

Thanks for the good advice guys. I have a couple of more points things I'm thinking about:
First, I am not convinced by the argument that some investments go up when others go down. It seems to me that if interest rates go up, then both bonds and real estate values will fall (though rents may go up). Further, stocks have been in a huge bull market, so there's no reason that all these asset classes won't move in lockstep, and I am unconvinced that they truly represent diversity. I really like what @Travis Sperr is doing - it makes sense to me that simply staying well capitalized and paying down debt is as good as diversifying in many respects, especially if that is your area of expertise.
Second, I guess I don't understand this life insurance thing very well. Can you please help me learn more? It seems to me that if I don't have a family or a business depending on me that life insurance is fairly useless. I'd need some math demonstrating that the returns realized by a life insurance policy are statistically more likely to produce greater income in future years than stocks, bonds, real estate, or entrepreneurial pursuits.
As far as IRA's go, I already max a Roth every year, and I contribute significantly (not the max) to a 401(k), so I do have a little diversification there.
Absolutely some investments will go up when others go down. The trick is figuring out what, specifically, is an "investment". For example - let's use apocalyptic vision here - let's say there was some massive planet-wide catastrophe such as a broad-based nuclear war. Some investments would probably go down - most of the ones we typically think of as investments, most likely (real estate, stock, etc) - and other items (let's call them investments) would become super-valued - radiation-free food & water; geiger counters; weaponry for fighting off zombie hordes.
OK, so that's a fantastical scenario. Looking at it more reasonably, money is always going to chase what is perceived to have the greatest value to the investor. There might be sympathy in the investments you illustrated - bonds and real estate both falling, for example - but that fall, unless those pulling their money out of those vehicles are stuffing their mattresses, is going to buoy something else. It's more a matter of figuring out what is being chased. Most people (myself included) aren't sophisticated enough to be hip to every possible investment at all possible times, so getting too crazy is something like what David (well, Warren) mentioned as a fool's folly. Still, I think of diversity as a way of remaining reasonably educated in a few different investment options, so that if something starts to really crater, and I don't have time for it to come back (or I believe it's not coming back), I can salvage some of the proceeds.
In the case of real estate, I agree with @David Faulkner that it is much more actively managed and thus can circumvent some of the ideas of diversification. I have always disagreed with the idea that real estate investment is a truly passive investment. Even if you have a PM company and automate everything possible, it still takes some level of oversight to be sure that your asset is not being devalued or misperforming.
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Bill S.Pro Member
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Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
So I thought what @David Faulkner said is genius. Diversification is for wealth preservation. No one with great personal net worth that they built themselves initially diversified. They focused on one thing and then when that was to the point they wanted to pull out, they then started to diversify.
@Scott Trench if your personal net worth is where you want it then by all means diversify. If not, keep going down the same road with great focus and adequate reserves. I agree with @Travis Sperr on the reserves and cash front. Just spoke with an investor who has an offer for their 4 plex in a not so great part of town for $600K. No way that place rents for more than $1,200 per unit per month no matter how nice you fix it. I am bullish on Denver but that is obscene. It might not be the top but if I was trying to time the market I would seriously consider selling.
In your shoes I would go for property #3 and perhaps hold in reserves the down payment on property #4.
It doesn't look like a good time to be stretching your neck out.
That is my 2 cents.
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Matthew Schroeder
Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes
10y
I will add to the comment about liquidity. A lot of people don't think about it, or don't give it its due attention. During the financial crisis & real estate meltdown, many solvent companies/people went bankrupt because they didn't have enough liquidity, and therefore defaulted on their obligations, and some/many (technically) insolvent companies which had a decent amount of liquidity survived the crisis.
In short, liquidity can get you through some very choppy waters, even if your solvency (balance sheet, whether company or personal) is upside down.
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
10y
I've thought about this too and it's tough because while we call it real estate investing it's a career too. It's what you do for a living so that's where your expertise and most of your money will be. But of course, that leaves you vulnerable to market fluctuations. The way we approach it is to try to keep strong reserves that are in diversified assets (mostly money market accounts and index funds, but also possibly going forward in some hedges against real estate and the US economy for additional security). Since it's small comparatively speaking, it acts more as a rainy day account than a diversified portfolio. But if there is another market crash, it will be extremely useful to have.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
I am not accustomed to posting personal information but it may help and it piggybacks off David's post above.
I do not have time to follow the stock market as much as I would like and even when I did when I was younger, I found it irrational, unpredictable and out of my control. I like the stock market as an asset class but I am not knowledgeable enough; so, I have to diversify. I have a low cost allocation of large/mid/small cap and international ETFs and reallocate and tax loss harvest periodically.
I invest in consumer loans and, once again, am not knowledgeable enough; so, I use a low cost RIA who specializes in consumer loans to handle it and it's extremely diversified. It's also tax efficient because I invest out of SDIRAs.
I invest passively with a real estate developer and vetted crowdfunding and found I have to be careful here with developer/sponsor, platform and property diversification and/or not over-allocate to this portion of the portfolio (unless I spend a bunch of time getting educated in this strategy and vetting the sponsors/developers...once again, need diversity when knowledge is lacking). I have less control than the direct real estate investing mentioned next.
Direct ownership of real estate, on the other hand, is right in my wheelhouse. It happens to be my highest earning asset class and the lowest risk one as well...plus I control it and am not at the mercy of others' decision making and self interests. For these reasons, I invest a disproportionate amount of my family savings in this class. I have actually allocated MORE to (stable) real estate recently as many asset classes are frothy right now. I expect these properties to hold up fine should a downturn occur and then can pivot as the overall market moves.
I personally feel that diversification and the ride it out strategy is middle class baloney that knowledgeable active investors on BP do not have to precisely follow because they mitigate risk in certain asset classes with knowledge. I'd rather have a large majority of my portfolio in one asset class that I know intimately than a bunch of diversified asset classes that I know very little about. David's Warren Buffet quote above says it all.
Many real estates investors jobs are really investing (in whatever asset) and the W-2 is just fuel for the investing engine; so, the allocation of personal capital is an important concept. Scott, I hope this helps and gives you something to think about. I am not normally this open in a public forum but I think it is an important concept that took me a little time to learn.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
This has been a great discussion. The idea of diversification as more of a rainy day fund or wealth preservation tool rather than a wealth generation vehicle is rarely discussed in my opinion, and if you know (or think you know!) what you are doing, it doesn't really make sense to aggressively chase less familiar options. I think I will start calling my own efforts my "rainy day strategy".
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George Wines
Investor · Denver, CO · Member since 2015 · 61 posts · 23 votes
10y
@JD Martin I think you were forgetting that the price of an asset is determined by the perception of value and that could change in lock step if panic strikes. Also talking about watching where the money is flowing with your inference that price movements are like water that is moving is not really correct. That idea does not take into account leverage or bankruptcy. Basically, the amount of water in the (investment) pool is not a fixed amount. So you cant always say that when one goes down, the others will be bouyed.
When you said...
"There might be sympathy in the investments you illustrated - bonds and real estate both falling, for example - but that fall, unless those pulling their money out of those vehicles are stuffing their mattresses, is going to buoy something else. It's more a matter of figuring out what is being chased."
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @George Wines:

@JD Martin I think you were forgetting that the price of an asset is determined by the perception of value and that could change in lock step if panic strikes. Also talking about watching where the money is flowing with your inference that price movements are like water that is moving is not really correct. That idea does not take into account leverage or bankruptcy. Basically, the amount of water in the (investment) pool is not a fixed amount. So you cant always say that when one goes down, the others will be bouyed.
When you said...
"There might be sympathy in the investments you illustrated - bonds and real estate both falling, for example - but that fall, unless those pulling their money out of those vehicles are stuffing their mattresses, is going to buoy something else. It's more a matter of figuring out what is being chased."
Something will be buoyed, even if it is just the market for thicker mattresses or shovels :) . An investment is just a place to park accumulated capital and (hopefully) leverage that accumulation to obtain more capital. Whether that investment is a bond mutual fund or tulips makes no difference. You are right in the perception of value, but unless all capital was simply obliterated in a panic, capital freed from its investment is going to flow towards some other vehicle. Again, the trick is in figuring out what that vehicle is. Maybe stocks, bonds, and real estate all collapse at the same time in Mad Max land, but the price for weaponry goes through the roof.
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Tim Burdette
Investor · Lexington, KY · Member since 2016 · 29 posts · 4 votes
10y
Mark S. I am under contract on my first rental property in Richmond. Would love to pick your brain about that market if you have some time.
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Ryland Taniguchi
San Francisco, CA · Member since 2015 · 786 posts · 717 votes
10y
Always diversify. That's what the hedge fu
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