Diversify Your Real Estate or Crash with the Market

Today's Financial News - Posted June 30, 2008

“Many real estate investors never get beyond their backyards. They add to their investment portfolios over time, yes… but by buying more of what they are familiar with.” — Lief Simon

by Lief Simon

Baltimore – (TFN): I met an investor recently who had created a big, profitable portfolio of rental houses in the Boston area. He was highly leveraged, but he had positive cash flow. Mortgage payments were made. Repairs were covered. And there was a nice bit left over at the end of each month. Life was good… until the local economy skidded. In a matter of a few months, as jobs were lost and people moved out of the area, this guy found himself with negative cash flow. Long story short, he eventually lost most of his houses to the bank.

Many real estate investors never get beyond their backyards. They add to their investment portfolios over time, yes… but by buying more of what they are familiar with. This approach can seem prudent, but it carries a big risk. If the market that you know… that you’ve made money with in the past… that you’re comfortable with, turns… well, you’ll wish, maybe too late, that you’d diversified at some point along the way.

The leverage was a critical factor in this situation, of course, but the fundamental problem was that this investor had all his eggs in one basket. He wasn’t able to ride out the downturn in the Boston rentals market because every one of his investments was in that market. Had he owned even a few rentals somewhere else, maybe he could have juggled cash flows and held on to his assets.

Another investor I met during the pre-construction boom in the U.S. bragged that he controlled more than $10 million worth of apartments under construction. He controlled them with small deposits… mostly 5% down… and planned to flip them before they were completed, as most pre-construction investors do. He hadn’t been at this long, and he didn’t understand the risks. The key risk with pre-construction, is not being able to sell on your contract before the balance of the purchase price is due for closing. Read on to learn more.

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