Geographic Diversification: A Must-Have for Real Estate Investments
Published July 12, 2022Share this article
Diversification is all about spreading out your investments to mitigate risk, and it’s even more vital when it comes to real estate investments. States, cities, and regions have widely volatile markets, and you don’t want unfavorable fluctuations in a single location to tank your portfolio. That’s why geographic diversification is a must-have component of any real estate investment.Now, don’t panic thinking you need to purchase properties throughout the country. While that’s a strategy for institutional investors (think big banks and corporations), it’s not really practical for your everyday property owner or investor. An investment strategy like that takes a lot of money — and it also takes time and scale to manage.It’s extremely difficult for a single property owner to acquire and operate rental properties in multiple regions. You have property management, tenant relations, maintenance, rent collection, regulations, and emergency calls to handle (all across borders). While you can delegate some of these responsibilities to property management companies, they’ll eat into your earnings and kill your profits — and they can often be difficult to work with, as well, making it far from a hands-off experience.Fortunately, there’s an easier way to obtain geographic diversification without owning a small fortune, but we’ll get more into that further down the article.Not sure what geographic diversification is or how it benefits your portfolio? No worries — we’ve included everything you need to know in the content below.First, let’s get on the same page about what geographic diversification is — then, we’ll cover why you need it and how to get it.
What Is Geographic Diversification?
Geographic diversification is the practice of investing in real estate securities from different regions. Spreading your money across states, counties, and cities ensures that a single market failure doesn’t sabotage your entire portfolio.For example, you wouldn’t want to invest all your money into a single stock. Regardless of how good that business is doing or the optimistic forecasts for the industry, a single slipup or poor earnings report could wipe out your investment’s value.The same is true when it comes to investing in real estate. Instead of putting all your money into a single promising market — say, Phoenix or Raleigh — you spread out your investments across multiple markets. That might be Phoenix, Raleigh, Austin, Denver, Salt Lake City, and Seattle. While all these markets currently look promising, each has the potential to self-destruct (at any moment or never) due to natural disasters, economic changes, housing problems, cultural trends, or other issues.Why You Need Geographic Diversification
Try as you might, you can’t predict the future of real estate markets. They ebb and flow, dip and spike, and crash and soar sporadically. Yes, you can spot trends and capitalize on movements — but there’s never a guarantee your investments are foolproof.That’s why you should never put your eggs in one basket.Some Markets Outperform Others
In the end, some markets outperform others. Sometimes, that’s a very temporary shift, or it might be a long-term market evolution.Real estate markets in different parts of the United States (and even in different parts of the world) aren’t always correlated. A crashing market in Baltimore doesn’t mean a crash in San Francisco, and a blossoming market in Washington D.C. doesn’t mean a blossom in Miami.However, just because Austin had 35% year-over-year rent price growth doesn’t mean you should necessarily throw all your investment capital at it. What if a significant resurgence of COVID-19 in the region scares off potential buyers and renters? Or what if a tornado ravages the area and destroys many businesses, homes, and investment properties? The market would respond accordingly in these scenarios, and you’d likely suffer a loss.It’d be smart to invest in any of the top-growing markets, but it’d be even smarter to invest in all of them. It’s likely these markets will continue thriving in the near term, but it’s very unlikely they’ll all crash simultaneously.Geographic Risks
Here are a few geographic risks to consider when diversifying your real estate portfolio:- Wildfires: Escalating climate crises have shown a global increase in wildfires, and this trend looks to grow with a 14% increase by 2030 and a 30% increase by 2050.
- Ocean Rise: Sea levels are rising about 0.13 inches every year. Coastal areas (especially those susceptible to frequent hurricanes) become increasingly dangerous. 300,000+ coastal homes risk regular flooding by the year 2045 — but the value of these properties will tank well before then.
- Economic Changes: Businesses rise and fall, jobs come and go — and they have a massive impact on local economics. This is just a single economic factor that can impact a state or city.
- Housing Issues: House values jump when supply can’t keep up with demand, but what happens when a boom in development swings the supply to exceed demand?
- Pandemics: We’ve seen firsthand how a global disease can affect local housing markets. For example, with many jobs going remote due to the COVID-19 virus, close to 5 million Americans left major cities in favor of suburban and rural regions.
How to Take Advantage of Geographic Diversification
Geographic diversification is easier said than done. Purchasing and holding real estate investments in multiple regions to satisfy asset diversification requires a large amount of capital if you’re trying to go it alone.Fortunately, there’s an easier way. And it requires much less upfront capital and ongoing burdens.The answer is Flock.Flock lets you exchange your rental property for shares in a portfolio of homes. You get steady income and upside potential, but you leave behind the hassles and worries of traditional property ownership.Oh, and diversification is built in.Flock owns properties across states, cities, and neighborhoods, ensuring your risk is mitigated while still capturing upside gains. Instead of purchasing and managing real estate properties in multiple markets, you can trade your property for an already geographically diversified portfolio.Pretty nice, right?The process for getting started is simple:- Submit Your Property for Valuation
- Receive an Offer
- Move Your House — Tax-Free
- Passive income
- Upside potential
- Tax-deferment
- Liquidity
- Efficiencies at scale
- No more maintenance and management
Landlords, retire and minimize taxes.
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