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The rental market fluctuates due to many factors, from the health of the economy to the movement of your local housing market. If you only have single family properties, you may run into a situation where you have units sitting empty on the market because interest has shifted away from these property types. If you have a diverse rental property portfolio, shifts in one area won't necessarily affect shifts in another. If you're worried that your single family rentals are about to become less profitable, it's a good time to look into multi-family properties either in your area or any where else but for easy maintenance or Tired of driving back and forth across town to handle maintenance and other tenant issues with your single family property homes? You only need to go to one property for handling all the maintenance issues with a multi-family property. If the entire building is handled by a large furnace and other systems, you may be able to address multiple tenant issues with only one maintenance visit. That's time saving efficiency that gives you more time to enjoy your life.More Cash Flow Buffer, If a tenant suddenly moves out of your single family property and you don't immediately have a replacement, you aren't getting any income out of that property during that time period. If you have a multi-family property, one tenant moving out in the middle of their lease term isn't a major cause for concern. You still receive income from the property from other tenants, so your cash flow is buffered against major changes.
If you’re branching into a new market, you should either know a lot about that market or research the hell out of it before you buy into it. Not all markets are created equal. Crunch the numbers at the price points and rental ranges and ensure that it’ll be profitable FOR YOU. Also, if the market you’re looking to enter is a market that you’re not physically close to you should weight that more towards remaining in the market you’re in. While I get what you’re asking in theory (diversifying), this is more of a “don’t fix what ain’t broken” situation.
It is very unlikely that an event will occur that will cause you to not be able to identify new tenants in your current market or retain the tenants that you have. But the unknowns with the new market are a risk. That being said, if your finger is on the pulse of the market and you see a really great potential for growth that’s opportunistic…research/diligence the market and the properties to the ground and if it checks out, pull the trigger.
I have done the latter in one instance. It’s going to be very profitable once renovations are complete, but it’s also going to require a much larger capital outlay than I originally anticipated. It’ll still be very profitable because I calculated worst case scenario numbers and it was still feasible and we haven’t reached that worst case yet.
Godspeed!
Edit: Cashflow was my biggest concern going in and it remains my biggest concern. But if the risk is worth the reward then do it.