SS215: Understanding the Difference Between Diversification and Specialization in Property Investment

  • February 2, 2025
  • Rokon Ahmed
  • Strategy Saturday
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SS215: Understanding the Difference Between Diversification and Specialization in Property Investment

At some point in their investing careers, active real estate investors must decide between diversification and specialization. In this episode, Charles discusses the pros and cons of each strategy and how some investors can successfully accomplish both objectives.

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Talking Points:

  • When I speak to real estate investors, there are 2 common investing mentalities: specialization and diversification.
    • Specialization investors want to double down on a strategy that has worked repeatedly for them: wash, rinse, repeat investors. For example, when I began buying multifamily properties, I purchased small multifamily properties, all within a .5-mile radius. It allowed me to duplicate a successful process in an area I was very familiar with.
    • Diversification investors, on the other hand, are more interested in spreading their investment dollars over many properties, in different markets, and possibly over various real estate asset classes as well.
    • What type of investor are you? I am a specialization investor when actively investing in real estate. I understand the markets I am investing in thoroughly and only invest with an experienced team with decades of experience managing similar properties and projects. I have a narrow buy box for actively investing and focus more on successfully buying deals within those parameters than venturing into different asset classes.
    • When I passively invest, however, I would consider myself a diversification investor, choosing properties and deals in different markets and asset classes.
    • When I speak to new investors looking to become active real estate investors, I also suggest they specialize. Choose an investment strategy and a market, start investing, adjust your strategy and investment criteria as you go, and then repeat. I believe it gives you the highest probability of success.
  • Let’s break down the pros and cons of each strategy.
    • Specialization
      • Allows you to repeat an already successful strategy. If you purchase a duplex in a neighborhood, renovate it, and rent it out at a profit; you most likely can duplicate that again with a very high probability. Even if the property if the property is slightly different, like 4 units instead of 2. It also makes learning from your mistakes much easier since you are practically repeating what you just did. One last benefit is that you already have a team familiar with their investment strategy. Your attorney, loan broker, real estate broker, property manager, contractors, etc., will already understand what you are trying to accomplish, which should make similar properties much more straightforward to execute in the future. If you were to diversify, you would be starting again from the beginning with every future purchase. Trying to replicate and fine-tune the process on future deals should lower risk and reduce the time you need to invest in every property.
      • The main con with specialization is that your investment funds are very concentrated. In one asset class, in one market, and maybe even in one neighborhood. If you invest in short-term rentals in one city and the city restricts or prohibits them, you will find yourself in a very difficult position. Additionally, if there is a weather event or other event outside of your control, it could upend your investment strategy.
    • Diversification
      • When you diversify your portfolio by investing in different property classes and/or in different markets, you have access to more investment opportunities. Still, you must also consider the team aspect, mainly who will manage the property.
      • When you diversify, you are spreading your risk since you are less concentrated. It is a great strategy, but asset management is more time-consuming unless you have solid on-the-ground teams in each market you invest in.
      • I regularly see mom-and-pop investors who diversify into different property types but stay in the same area. They might have a couple of apartment buildings, a single-family house rental, and maybe a small commercial property. They acquire good deals as they become available in their target market, so they don’t really have to build a new team. They just add additional properties to their portfolio.
      • When you diversify outside of your initial market, you are now starting from scratch in the new market, depending on how far it is from your initial market. You must build a team, find more contractors, hire a property manager, etc. Compare this to having one team, one manager, which makes the asset management portion easier. Additionally, when you have one target market, the more units you have, the lower your management costs will be, and you have the ability to find and retain better team members and contractors since you are giving them more business.
      • Diversification is much easier to achieve with passive investing since you are investing with an operator who already has a team that you are tapping into.
      • One of the biggest mistakes I have made is passively investing in assets that I did not fully understand, and thus, I didn’t perform adequate due diligence. This can be easy to do since it is very easy to invest passively, and you do not want to be a spray-and-pray investor. You want to ensure you always do proper due diligence on every sponsor you invest with.
  • Investors can succeed with either strategy, but it starts with figuring out your goals and choosing the best approach to help you achieve them. Also, check out episode SS198, where I discuss how to Develop your Real Estate Investment Criteria.

Transcript:

Charles:
Did you know that focusing too much on one investment strategy could leave your entire portfolio at risk, but diversifying could spread you too thin? So what’s the answer? Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re discussing a game-changing topic, the difference between diversification and specialization and property investment. These two strategies shape the way investors build a portfolio as so managers can ultimately succeed or fail in real estate. By the end of this episode, you’ll have the clarity you need to decide whether specialization or diversification fits your goals best. So let’s break it down. When I speak to real estate investors, there are two common investing mentalities, a specialization and diversification specialization in investors, they wanna double down on a strategy that has worked repeatedly for them. Wash, rinse, repeat investors. For example, when I began buying multifamily properties, I purchased small multifamily properties all within a half mile range, and it allowed me to duplicate a successful process in an area I was already familiar with.

Charles:
Diversification investors on the other hand, are more interested in spreading their investment dollars over many properties in different markets and possibly over various real estate asset classes as well. So what type of investor are you? I am a specialization investor when actively investing in real estate, I understand the markets I’m investing in thoroughly and only invest with experienced team, with decades of experience managing similar properties and projects. And I have a narrow buy box for actively investing and focus more on successfully buying deals within those parameters and then venturing into different asset classes. When I pass the invest, however, I would consider myself a diversification investor, choosing properties and deals in different markets and asset classes. Now, when I speak to new investors, look and become active real estate investors, I always suggest that they specialize. Choose an investment strategy in a market. Start investing.

Charles:
Adjust your strategy and investment criteria as you go and then repeat. I believe it gives you the highest probability of success. So let’s break down the pros and cons of each strategy. So starting with specialization, it allows you to repeat an already successful strategy. If you purchase a duplex in a neighborhood or renovate it and rent it out at a profit, you most likely can duplicate that, again, with a very high probability of success. Even at the property is a slightly different, it’s like four units instead of two units. It also makes learning from your mistakes much easier since you are practically repeating what you just did and making changes and tweaks from what you did before for your new project. One last benefit is that you already have a team familiar with the investment strategy. Now, your attorney, your loan broker, a real estate broker, property manager, contractors, et cetera, will already understand what you’re trying to accomplish, which should make similar properties much more straightforward to execute in the future.

Charles:
If you were to diversify, you would be starting again from the beginning with every future purchase trying to replicate and fine tune the process on. Featured deals should lower risk and reduce the time you need to invest in every property. Now the main con with specialization is that your investment funds are very concentrated in one asset class, in one market, maybe even in one neighborhood. If you invest in short term rentals in one city and the city restricts or prohibits them, you’ll find yourself in a very difficult position. Additionally, if there is a weather event or other event outside of your control, it could upend your entire investment strategy. On the other hand, with diversification, when you diversify your portfolio by investing in different property classes and or different markets, you have access to more investment opportunities. Still, you must also consider the team aspect mainly who will manage the property, which is what successful property investing really comes down to the boots on the ground property managers.

Charles:
Now, when you diversify, you are spreading your risk since you are less concentrated. It is a great strategy, but asset management is more time consuming unless you have a solid on the ground team in each market you invest into. Now, I regularly see mom and pop investors who diversify into different property types but stay in the same area. They might have a couple of apartment buildings, a single family house rental, and maybe a small commercial property, and they acquire good deals as they become available in their target market. So you don’t really have to build a new team, they just add additional properties to their portfolio. Now, when you diversify outside of your initial market, you are now starting from scratch in that new market, depending on how far you are from your initial market. So if you’re buying stuff and you buy a 10 unit apartment complex here and then you buy a 15 unit complex over here and say they’re 15, 20 minutes apart from each other, not really too much of a problem because those areas, those properties that those areas have scale, right?

Charles:
It makes sense for some of the drive out to that property once a day every other day and fix issues there or take care of management. It’s much different. If you have your five unit here, a duplex next door, and then you have a single family house that’s 45 minutes away, that’s gonna make your whole management process a lot harder to execute. It’s gonna be much, a much harder too to find contractors from this area to go to that area. So really just for the single family rental that maybe you got a great deal on, you now have to put together additional contractors to be able to handle it. And when you do that for that one property over here, it’s not going to assist with lowering the cost here. Whether if you just purchased here, you can have that scale of economy because you can utilize those contractors over and over again.

Charles:
Now, one target market, the more units you have, it lowers your management costs and you have the ability to find and retain better team members and contractors since you’re giving them more business. This also allows them to do things for you that otherwise they wouldn’t be able to assist you with or would spend time with. So if you were, you know, you do a couple deals with them and you’re doing a third deal with, then what happens is that they say, oh, I will walk this property with you. I’ll do it for a bid and I’ll, I’ll go through and tell you exactly the problems that you might have with it and really going through a property with you without having to really pay for it because they’re hoping they know you’ve already purchased before and they’re hoping you do it again, and that they’ll get that business.

Charles:
And diversification is much easier to achieve with passive investing. Since you’re investing with an operator who already has a team that you’re tapping into, you’re really, really riding in their coattails or being plugged into the process they already have. But one of the biggest mistakes I have made passively investing in assets is that I did not fully understand and thus I didn’t perform adequate due diligence on them. And this can be easy to do. Since it’s very easy to invest passively compared to actively investing, it takes a lot less time to they invest. And you do not want to be a spray and pray type passive investor or investor at any any point, and you want to ensure you always do proper due diligence on every sponsor you invest with. Now, investors can succeed with either strategy, but it starts with figuring out your goals in choosing the best approach to help you achieve them. Also, check out episode SS 198, that’s SS 198 where I discuss how to develop your real estate investment criteria. So I hope you enjoyed, please remember to rate, review, subscribe some many common potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS198: MASTERING Real Estate Investment Criteria for Maximum Returns

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