Summary: While it is more work to find properties and build teams in multiple markets, there are numerous benefits to having your real estate portfolio scattered across several areas and/or States. We currently own properties in three different markets and are looking to expand into at least a fourth. In this post, we cover the upsides and downsides of buying properties in multiple markets based on what we’ve seen over the last several years in our own portfolio.
Let’s face it. Most people feel comfortable investing locally. They have more knowledge about the neighborhoods. They take comfort in being able to visit the property during the inspection or drive by at random times (though in reality, they probably won’t end up doing that much if at all!). They’ll want to meet their agent and team in person whenever they want.
We’ve extensively covered why you should consider investing long distance and how to be successful at it in previous articles. This series of articles is especially relevant to those of you who live in a high cost of living areas and have a more difficult time procuring cashflowing properties at a decent price.
However, acquiring the skills necessary to invest long distance is also relevant for those of you who invest locally. It’s even important for those of you who have been successfully investing in only one market up until this point. Investing in a second or third market on top of where you live can offer a lot of upsides.
Kenji and I first started investing in two markets at once. Since then, we’ve grown our portfolio to span four distinct markets (though we’ve recently sold a property, so are now only in three). We have learned through the experience of owning in different economies, having different teams, and seeing the nuances of very distinct markets.
In this post, we cover the upsides and downsides of investing in multiple markets, so you can see why we continue to push ourselves to expand into even more markets as we continue to grow our portfolio.
Upside: Risk mitigation
Risk mitigation is the number one upside for expanding into multiple markets. When you buy in different markets, there are a number of ways you mitigate risk.
First, you mitigate it in terms of natural disasters. You can imagine how a major earthquake in Seattle would affect you if all your rentals were in this area. Similarly, a hurricane, a flood, or even a fire could wipe out your rentals if all of them are in the same area.
You also mitigate your risk by diversifying into different economies. If Boeing moves out of Everett, WA, our rentals in that market will likely be affected. Our rentals in Lakewood, WA (over two hours South), won’t be. Neither will our rentals 5 hours away in Spokane.
We also mitigate our risk in terms of downturns and upturns. Seattle, for example, has been growing exponentially in the last several years, so we’ve had market appreciation affect a number of our properties. Meanwhile, when we owned in Oklahoma City, it was more of a stable market, meaning it was easier to find cashflowing properties. Market appreciation was less likely to be a factor in our growth in this case. Likewise, if we were invested in a city that ended up losing population density over time, it’d be nice to have properties in other areas, so we could average it out across our portfolio.
Upside: Ability to quickly shift from market to market
The ability to use your properties like chess pieces, trading them up or down, and moving them from place to place can make a difference in your overall growth. You can do that by owning multiple properties in the same area. However, owning in different markets makes that movement potentially more lucrative.
Let me give you an example. Several years ago it got harder to find cashflowing properties in Western Washington. Because of that (and because we wanted to increase our diversification by entering another market), we started looking at properties in Eastern Washington and in particular Spokane. We found a number of properties that cashflowed well fairly easily. A couple of them were single family homes around $150,000.
Two years later, Spokane had taken off. Our single family homes purchased at $150,000 were now worth $240,000. Given that market appreciation, we wanted to sell. But, we didn’t want to just buy in Spokane, since it had now heated up. There were less good deals to be found. There was market appreciation across the board there. So we moved our money into another market, south of Tacoma, WA.
In the meantime, we also had the opportunity to cash-out-refinance a property we had purchased south of Seattle. We had forced appreciation, and it had market appreciation as well. We decided to roll the proceeds of that property into a property in Oklahoma City.
The ability to move our money from market to market and take advantage of market appreciation over time (but not pay a premium due to that market appreciation that had already happened) has been valuable to the growth of our portfolio.
Downside: The time and effort spent
The biggest downside to investing in multiple markets is the investment of time and work it requires.
You have to re-build your team in each location. That means finding new real estate investor agents, new contractors and new property managers at a minimum. If you put your property into an LLC, you may also want a local lawyer, and, to improve your lending choices, you will likely want to build a relationship with a local banker.
It’s going to take several months if not longer to really nail down the final players on your team. It takes time and experience to know which member of your team is trustworthy and delivers quality work. In the meantime, you’re going to have to make the effort to replace under-performers with new options.
If you want to learn exactly which team members you need to build a rockstar real estate team, be sure to download our FREE Guide below!
You also have to build your knowledge of the market. In order to mitigate risk, you need to have a sense of the path of progress, which neighborhoods you want to invest in, and even things like whether single family homes might rent for a premium over multifamily. You also need to start to understand how much rent to expect for different units and how much you should expect to pay for different types of rehabs. The amount of knowledge you gain over time in a market is really significant.
Downside: Lack of focus
The other major downside comes as a result of juggling properties and teams in multiple markets: the lack of focus.
When students take our introduction to real estate course, Zero to Freedom Through Cashflowing Rentals, we spend a lot of time talking about how focus is important to success.
That’s because focusing on one market and understanding it will help you make better decisions.
You will know the neighborhoods where you don’t want to invest. You’ll understand where the path of progress is and where you might find market appreciation as well as cashflow. You’ll know how to recognize local issues with properties (ie many Oklahoma properties have foundation issues due to the soil). Also, you’ll know what renters are looking for in properties. Finally, you’ll be able to list market rents off the back of your hand.
You also have the opportunity to build deep relationships with your investor agents, who will put you on the top of their lists to get off market deals. You’ll have experience working with contractors and know the quality of their work. You will also know which inspectors are thorough.
If, on the other hand, you only own one property in a market before moving onto another market, you won’t have the opportunity to build a deep knowledge of the market and those relationships that are at the base of your success as an investor.
So what’s the right fit for you?
Even though you may be doing well investing in one market, we believe there is value to exploring other markets. This is in order to potentially mitigate risk. It can also create great options and flexibility for building your portfolio.
So what do you think? Are you planning on owning properties in several different markets?
