Geographic diversification is effectively investing in various locations and places within your home country or abroad.
Geographic diversification enables you to take advantage of the various local and regional, and national nuances and idiosyncrasies present in each market.
Not all geographic regions perform the same. Not all geographic regions perform the same over the long term. There are markets that do better for some time periods and for some product types.
Geographic diversification goes beyond just investing in a different state or a different country. It can also mean investing in a different region of the same State, Country or Province that you’re in. Geographic diversification can also mean investing in different submarkets, within a larger geographic region.
There are four things that I believe that you should consider as it relates to geographic diversification.
The first thing you should consider related to geographic diversification is that you don’t delude yourself into thinking that if you invest in one particular area of Seattle, for example, and then you invest in another part of Seattle, that that’s true diversification. True diversification comes from having property in different geographic areas as well.
The reason for that distinction is that if one area has a major shock such as an economic shock or natural disaster shock, another area may be the benefactor of that shock, or may have been totally unaffected.
One example is technology. Silicon Valley and the San Francisco Bay Area in Northern California have really been the hub of technology for decades – really since the 1950s or 1960s. Many large companies came out of the region, but over the recent past, with technology being ubiquitous around the globe, technological innovation and job growth has expanded. Now, we have places like Silicon Sands and Silicon Alley.
And you also have Silicon Valley type places popping up in other locales around the World.
What were once considered secondary tech hubs are now becoming primary tech hubs like Los Angeles, Salt Lake City, Dallas, Austin, Nashville, Raleigh, London, Amsterdam, China, Tokyo, Nigeria, and Bangalore.
The list goes on and on.
Technology is a means for connecting people.
And it’s easy to connect via technology.
And it may not change that Silicon Valley remains the heart of technology, but from a real estate perspective, in order to get true geographic diversification, it may be smart to invest in primary and secondary markets that are benefiting from technology.
It may make sense to also invest in markets that are benefiting from an even more diverse economy. For example, investing in one market that is technology driven, another market that is driven by the healthcare and medical space, and yet another market that is driven by industrial warehouse and/or last mile industrial.
Those are examples of different product types, but you can invest in different geographies for the same reasons.
The second thing to consider related to geographic diversification is the impact of a natural disaster in a given market. If you are invested in multiple geographies rather than having all of your money concentrated in one geography, you are insulating yourself from a negative shock due to natural disasters because you would not be fully impacted by the event that took place in that singular market.
For example, with the recent tornadoes that hit the Midwest in November 2021, it could have been bad for you as an investor if all of your invest dollars were in Kentucky. However, if you had some investments in New York, Florida, Kentucky, Texas, California, and Oregon, you would have sheltered yourself more so than someone with all of their assets in one geography.
It doesn’t mean that there aren’t any issues with geographic diversification like management and even travel (given the pandemic), I will say that I personally feel more comfortable having asset type and geographic diversification than if I had all of my assets in one market. As I’ve stated before, I am conservative and prefer diversification compared to concentration.
The third thing that should be considered related to geographic diversification relates to obtaining economies of scale. Even though I do invest in one-off deals, I still believe that it’s important to try and get some level of scale over time. I generally like to invest in more than one property in each locale although that doesn’t always happen.
Most of the time, I only invest in a State or area as a one-off investment if I am investing passively with a Sponsor I know, like, and trust who I believe can assist with my overall diversification strategy. With my style of investing, I am typically trying to get a mix of geographic diversification, asset type diversification, and sponsor diversification. Each of those strategies are important to me, but I have seen that not everyone is comfortable with each of those strategies.
The fourth thing you should consider related to geographic diversification is travel.
When you are a real estate investor, and if you can claim that you are an active investor, you have the ability to travel to and spend time in the places that you are investing in, and still have those be a write off against your income in the US.
Some of the passive rules are strict related to what you can do and what you can write off, but I still stand by the fact that I like to invest directly in places where I have a need and or a desire to return to. I have made it part of my practice that I’ve invested in markets where I have family or friends if that market is economically strong.
When investing in the US, I’m broader in my perspective because I know the market well and have traveled and lived across the US. I do look for strong markets where I believe that there’s upside. I like markets where there’s good job growth, positive in-migration, investments that are below replacement cost, and markets/investments with a solid good going in cash on cash return.
For me, geographic diversification is one of the main diversification methods that all real estate investors both passive and active alike should be considering. Geographic diversification is not something that all investors think about very often and many don’t think that they need geographic diversification as part of their investment thesis. But for me, I feel that it’s imperative and I feel that it’s a fundamental part of my investment thesis. I feel that without geographic diversification, I would have many sleepless nights. Geographic diversification is something that I will continue to focus on with my investment, and it’s going to be something I strive for in all of my real estate investing endeavors for the entirety of my investing career.
Until next time, let’s continue growing our cash flow and net worth together!
-Robert