If you’ve ever dropped a smartphone face down on the pavement, you know what a hassle fragmentation can be. What was once a perfect, smooth screen is now 30 pieces of shattered glass. Strangely though, most often the phone continues to work. Sure, it’s a little inconvenient, but you make adaptations. Touch screens work through plastic bags, and your phone is probably more waterproof from the confines of a Ziploc.
So maybe it isn’t a perfect analogy (and we’d recommend getting your phone fixed), but the point we’re trying to make is that fragmentation can also be used to your advantage. For our purposes in discussing real estate, fragmentation refers to the way real estate operates by way of a variety of people doing everything in a variety of different ways in a variety of areas. One portion happens here, another there, another way over here, and so on. And while that can be frustrating or even a bit scary, it is an inevitability of the business that can actually work in your favor.
First, fragmentation acts as a defense mechanism for investors. It is more difficult to confiscate and the act of doing so costs significantly more than 401k and IRA assets, so it is less likely to happen. Second, laws governing the landlord-renter relationship happen on the local level. This local focus ensures that large, sweeping changes (even on a national level) are less likely to change the renter-landlord relationship for income properties throughout the country.
Next, fragmentation helps real estate investors by keeping institutional investors out of the business. Because you’ve got property managers doing things differently, every developer, every real estate broker in every different market around the country, these institutions stay out of it, which allows more opportunity for individuals. When large institutional investors become involved, they sell shares and collect money off the top (hello, Wall Street!). Fragmentation helps prevent this.
Finally, you should embrace fragmentation in real estate, but specifically within your own portfolio, by diversifying (fragmenting) your own investments across different areas and markets.
The Jason Hartman Team