Posted by Dave T on February 02, 2010 at 20:25:27:
There is such a thing as diversification within an asset class.
If the asset class is real estate, property type diversification could be achieved with single family rentals, multi-plex residential rentals, and commercial properties in the portfolio.
Even within a single property type, geographic diversification is achieved by purchasing in different cities/states/countries to minimize the impact of an adverse economy in a single rental market.
Which house would you buy between these two? - Posted by Unsure
Posted by Unsure on February 01, 2010 at 09:12:17:
I am in a pickle: Which house do I buy?
I own 2 houses in a certain zip code in my area (STL), and two in other separate zip codes/school districts. The area where my two houses are located is a good area: Rents are good, school district is desirable, and the inspectors are absolutely crazy and make things very difficult (which is good for values, etc.).
Anyway, I am looking to buy two more rentals in the first quarter and can’t decide if I go back to the same area/zip code with my other two rentals, or I branch out to a new area. Here’s the rub: The new area has about the same prices for their houses (3beds/1 bath), but the school district is not as good and the rents are probably $100 less per house.
I know the importance of diversification, so I am a little concerned about buying more houses in one area, even though I think it will really take off. I plan on buying another 20 houses or so over my career (Lord willing), and don’t want to over-do it one area. However, if that area is really good for rentals, perhaps I should focus on it. I know the values - and rental rates - like the back of my hand. I think you can see my predicament.
Curious to see what my fellow investors would do. Thanks so much for your time/insight.
Re: Which house would you buy between these two? - Posted by Patrick
Posted by Patrick on February 03, 2010 at 09:19:36:
Unsure,
Diversification is a stock term to blend your winners and losers. It is well known when picking individual company stocks that 60% correct is a good average, that’s not the rule for REI. Here’s a couple of rules to follow in REI.
1.Make your money on the property going in. Meaning purchase at a price for less than market in case of downturn or need for quick cash.
2.CASH FLOW IS KING!!! own the whole darn block if you can. Cash flow is : Rents minus .25 (on residential) equals your cost basis.
Good day
Patrick
PS/ my apologies to terry and all for the previous post where is used the word d**n instead of darn
Re: Which house would you buy between these two? - Posted by Gene
Posted by Gene on February 02, 2010 at 13:23:46:
IMO…Look for the deal.
Of course you have to factor in the neighborhood, rents, etc into the equations. But if you feel that you have an understanding of values of both areas then don’t limit yourself to just one. Work deals in both…buy the best deal.
Re: Which house would you buy between these two? - Posted by Sailor
Posted by Sailor on February 02, 2010 at 11:38:38:
I only buy in one neighborhood, which I refer to as my “virtual MHP.” I know the real value of each & every property, as well as a lot of history. I save on time, effort & gas, but note that I spent a lot of time picking my neighborhood. Neighbors call me when they want to sell. I am a big fan of diversification, but I agree w/Maurice that means different types of investment vehicles, not different neighborhoods. I know my neighborhood, & knowledge is power. If you’ve got a good area, I recommend maximizing your position. You could eventually control your mkt.
Tye
Re: Which house would you buy between these two? - Posted by Maurice
Posted by Maurice on February 01, 2010 at 19:20:01:
This looks like a no brainer to me. If the houses are about the same price, but you can get $100 a month more AND better tenants because the schools are better, buy them.
You never regret buying quality especially at a bargain price.
As far as diversification goes, you can diversify around the good area. This is not really what diversification means, in real estate prices tend to go up and down together anyway.
Real diversification would mean putting some of your money in gold, or the stock market, or bonds etc.
What you are talking about is diworsification not diversification.