Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions. If this is your first time here, remember to hit that subscribe button. So each and every week you are notified of when we put out a new episode.

So today's question comes from Clay and generally his questions about diversification in multiple markets and he says, hello, Marco. Loved the podcast. Keep it up. Thank you. First question, we have five properties in New York state in the same city. The cashflow is great and reliable, mostly 10% cap rates or one and a half to 1.7% rent to value ratios, which I will explain in a moment. He's saying these are C plus to B minus neighborhoods. I'd like to buy 20 additional properties, but not sure if perhaps I would be better off diversifying away from the same city that I'm currently in, perhaps into Indianapolis or Memphis. For example. Money would not go as far and returns would be lower, but I'd be diversified.

His second question here is all of my loans are residential. As all of my properties are for family or less. I have six loans currently but will easily surpass 10 if I am to reach my 25 property goal. In this case, would you recommend commercial loans? Everything I see and hear is 10 loans or less. It seems to be the magic number for residential above which you have to go commercial, which doesn't seem to have as favorable terms. I look forward to your answers. All the best, Clay.





Clay, thank you for your two questions and there's probably more buried in there if I was to really just think it through, but let's talk about the first thing here. I guess the first question that I would ask is what is your overall strategy?

Are you focused on building a real estate portfolio strictly for the cashflow and focused on markets that will give you that? It sounds like what you have right now is producing very good returns. I don't know what the cash flows are like, but your cap rate and your rent to value ratio is very high. So that right off the bat tells me that you're probably in C class neighborhoods because it's hard to find a number of that high in better neighborhoods such as your upper B and eight class neighborhoods. And there's nothing wrong with that. Everybody has their preference and everybody has their strategy. So if you want to stay focused in your C class neighborhoods and you're, you're doing well and you're successful there, and maybe yourself managing these properties, so you have the ability to have your own personal control over the portfolio, that's great.

You know, fantastic and keep up the good work. But if you want to expand, then what you're essentially doing by applying geographic diversification is increasing your cashflow reliability and decreasing your market risk. So the goal of diversification regardless of the investment is generally to reduce an investor's overall risk. So diversification in real estate is pretty easily achieved by purchasing income, producing properties in different markets around the country. And these are markets that are geographically diversified. So typically they're going to be in another state or just far away from the existing market that you're in right now. And real estate investors also realize that diversification tends to reduce both the upside potential as well as the downside potential of their portfolios. And I know this sounds a little counterproductive or counterintuitive, but you have to remember that the reason investors want to diversify is to protect their real estate portfolios under a range of economic conditions.

They want to avoid being committed exclusively to a single market's economy. And that's the whole reason for diversification. So I guess without knowing more, I would say if you are very comfortable with your local market and you are confident about its future over the next two to five to seven to 10 years, which I know is a crystal ball question,