Thriving by Diversifying Real Estate Investments
Every day I have conversations with very smart investors that are making it big in real estate. This of course, is fun to write about and share with aspiring investors. However, some of the best lessons in life (and investing) are those that are positioned to aid us in avoiding pitfalls.
We have a rapidly changing real estate market in play right now. We went from a buyers’ market to a sellers’ market a few years back, in what seems like overnight. Today, we currently have a shortage of inventory.
How can this happen and how do you stay ahead of the game? Once you are able to stay ahead of the rapidly changing market, you have conquered what only 3 or 4% of investors ever accomplish. Most people are so wrapped up in the individual investment that they miss looking at the big picture.
To thrive in the real estate market, (especially a rapidly changing market) you want to do what I refer to as S.I.B.K.I.S (See it Big, Keep it Simple). Investing is much more than just the deal; this is where most people miss the opportunity. All too often people just start by looking for a property that could generate a good return and then buy the one they like the best. People who do this tend to be thinking more short term rather than long. To further add to the short term thinking, they often mass produce this and repeat with many investments in one small area. The purposeful and seasoned investors, however, know they must look at the big picture first; they know they want to diversify and spread their asset out to keep them safe.
Things to consider for the big picture:
- What is your overall objective with the investment? (Cash Flow, Growth, Value Play, Tax Benefit, Leverage?)
- Where can you get the best, most sustainable returns for your investment?
- What investment vehicle will you use? Buy and hold, turnkey investing, tax deed investing, notes investing (it is imperative to pick a strategy and stick with it. Do not chase every opportunity that looks interesting. Those who do this often never end up investing at all. Once you get good at one you can move forward to master another.)?
- (Possibly the most important question) Are you following where the seasoned investors are investing?
You will find that the seasoned investors are often a few steps ahead of everyone else. People tend to flock together in groups. Investors, especially new investors, feel there is safety in numbers. If everyone else is investing in this or that, then it must be safe for me too, right? Maybe, maybe not. We use this expression, “when the cream is skimmed off the top all you have left is the milk”. There is little value in the milk; the value is in the cream. Seasoned investors are always watching for the best investments; if you are going to follow someone, follow the pros.
Follow the seasoned investors around and see what they are up to. Where in the market are they investing? What investment vehicles are they using? Turnkey, buy and hold, tax deed, etc. Seasoned investors tend to stay ahead of the masses and are capitalizing on investments before the masses catch up. This is where you want to be, at the top of the investment strategies.
· As time progresses and the market changes, so will these strategies. Keeping up with the changing real estate market is paramount in order to be on top. As they say, “it is lonely at the top”, but lonely does not necessarily mean bad, it can mean less competition. ‘Lonely’ can be great for the purposeful investor who is in the know.
Why it is Important to Diversify Your Real Estate Investments
Diversify Locations: In mid-to-late 2017, there were a number of game changing storms. Texas and Florida both had hurricanes that took out a lot of property, and California had some horrific forest fires. It indeed got many real estate investors thinking about their portfolios.
I had a number of conversations in this time period with investors who were heavily invested in each of these markets, but did not diversify their investment locations. A number of Dashboard report readers who have followed our emerging market investing ideologies were suddenly experiencing ‘Ahha’ moments.
While diversifying their markets outside of their own backyards sounded interesting to them, many were just too comfortable doing the opposite. Mother Nature has a way of reminding us that putting all of our investments in one location (even when it is a great location) may just not be the best, most sustainable investment strategy.
Diversify Investment Classes: For many seasoned investors who have their investment styles mastered, it is a great idea to spread their investments over a sea of investment classes. Buy and Hold investments, Fix and Flips, Notes, Tax Deeds, etc. In one of our earlier posts, ‘Be wary of investing in a one horse town’, it was articulated that when a town has all of its eggs in one or two industries, just as Detroit did with the automotive industry, or Las Vegas with the gaming industry, the town can suffer big time when these industries falter. Because of this, investors want to diversify into multiple investment arenas and with multiple companies. I have heard of many great companies who go through internal problems such as embezzlement from an internal employee or external contract person. When that happens, it can take a great company with great intentions and give it countless hardships. Diversification is the only way to prevent large losses and to keep your investments sustainable over the long haul.
Equity Diversified: Do you have a large percentage of debt on all of your properties? This once hit many people during the economic bust (present company included). During tough economic times, do you have enough equity in your properties to weather times of reduced rents and hard to find tenants? Having some properties highly leveraged while others are only mildly leveraged, and perhaps even some properties that have no leverage at all, gives you the strength to maintain a sustainable investment portfolio.
There is a reason the Warren Buffets of the world are successful. They do not invest all their money in one type of investment or in one location. There are always outside influences that can steer the trajectory of your investments. The key is to be informed of what is happening in and around your investments.
Larry Arth is a coach and writer for How To Buy USA Real Estate.