For all you stock investors out there, you’re probably used to thinking in terms of asset allocation when it comes to putting together your portfolio. Maybe you got some pointers from a broker or financial manager or maybe you conceived some sort of allocation strategy on your own. Regardless, the point here is that, no matter what type of investment you choose to pursue, everybody knows it’s a bad idea to put all your eggs in one basket. What happens when you drop the basket?
Let’s take this idea of asset allocation to real estate. Jason Hartman has come up with a term we like to use that also reflects the idea of investment diversification. If you’ve been reading this blog for any length of time, the words are probably familiar – Area Agnostic™. The word “agnostic,” though normally associated with religion (or lack thereof) is important in understanding the thinking behind Jason’s term.
An agnostic – in the spiritual sense – believes it is impossible to know whether or not God exists. When applied to a real estate portfolio, we apply the same manner of thinking. An Area Agnostic™ believes it is impossible to know which area of the country will be best for investing going forward. Since no one knows how to predict much of anything with geographical certainty, the most profitable strategy is buy properties in a wide range of locations.
Though we have run the numbers ourselves and know that income property investing is the best investment option in history, that doesn’t mean that every single property will be a home run from the moment you sign on the bottom line until you sell it. That just doesn’t happen in the real world. By allocating your assets geographically, you achieve the same sort of diversification that stock investors strive for by not loading up their portfolio with all Microsoft, or Apple, or Enron (if your luck was that bad a few years ago) stocks.
This idea of being an Area Agnostic is so important that Jason even recommends you don’t buy a rental property until you can afford more than one, because what if that one single local market goes kerplunk shortly after you make your purchase? At the minimum you need to buy two properties in two separate markets. Even better would be to start with four different properties.
Area Agnosticism. Learn it. Live it. Don’t invest in real estate without it. (Top image: Flickr | Wallula Junction)
The Jason Hartman Team