If you can’t tell by now, I think it’s a good idea to invest in multiple asset classes, cities and states. Most importantly, because it spreads your risk.
Generally, I believe in this investing strategy because I like spreading my risk around and recommend investing in 3-5 different markets so you are protected if one goes down. Having said that, there is some “wisdom” you will need if you are going to be an active investor in an asset class that you know very well.
When I think about my orthodontic practice, I was working in many different markets. My patient base was not dependent on one particular population. There was an Army base nearby, a strong manufacturing industry, tourism industry and rural farm towns. All of these represent their own “market” of people and are independent of one another. I had multiple economies just in my own little “micro” economy.
Bottom line is, I would not recommend investing in just one market or area. I recommend investing in at least 3-5 geographic areas. For example, I like to invest in steady markets, such as Kansas City, Indianapolis, Birmingham, Memphis, and so on.
Why You Can’t Be An Expert in Every Asset Class
As far as asset classes, it is wise to invest in more than just one thing. I know people who are very heavily invested in multi-family units, self-storage, mobile home parks and so on. I think that is great because I enjoy making connections with people who are the experts in those areas. And, I cannot be an expert in all those markets.
If you are a passive investor (most likely with a W-2 job), you don’t have time to become an expert. For you, I recommend investing in multiple assets and putting your eggs in different baskets. You can join masterminds and meetings to make those valuable connectives. You can also find mentors and learn the skills you need to become a more active investor. In the end, if that is what you want to achieve, you need time, and it is especially difficult with a full-time job or business.
If, or when, you decide to leave your W-2 job to become a more active investor, I recommend you focus on just one asset class. The reason for this is that there are particular strategies that will be worth your while, such as setting up a team and having a business plan, which are also very time, money and energy-consuming. Strategies which you can’t do as a W-2, passive investor.
What Kind of Investor Do You Want to Be?
I also want to mention that your investment strategy will depend on what kind of investor you want to be: equity or cash flow. Or, maybe a mix of both.
Where are you on the spectrum of investing?
An equity investor doesn’t necessarily want cash flow, especially if it’s going to equate into more tax dollars owed. Equity investors are better off investing in properties that will have future growth, like our self-storage facility.
Our self-storage lenders will have delayed gratification on their investment return because self-storage is an asset that grows and builds equity. When they invest in something that’s worth $3M now, in 10-15 years that number will increase significantly. If you use this strategy 10-15 years before you want to retire, when you do retire, that asset will increase your net worth and give you cash flow.
Not every strategy works for everyone, and you probably fall somewhere on the equity/cash flow spectrum.
How to become an active investor will be next week on the blog. I will share the strategies and focus areas I think you should pay attention to, if you are transitioning or aspiring to becoming an active investor.