Don't Put All Your Eggs in One Basket: Geographic Diversification for Small-Scale Developers

By Mason McDonald

In the world of real estate development, risk is an ever-present companion. Market fluctuations, regulatory changes, and unforeseen economic downturns can significantly impact the success of a project. For smaller developers working on minor subdivisions (splitting a single lot into anywhere from 2-10+ lots depending on local regulations), mitigating risk is crucial for long-term viability. One powerful strategy that often gets overlooked is geographic diversification.

Instead of concentrating all development efforts in a single market, consider spreading projects across 3-4 different markets across the country. This strategy offers several key advantages:

1. Reduced Market Volatility: Real estate markets are cyclical. By diversifying geographically, you reduce the impact of a downturn in any single market. If one region experiences a slowdown, projects in other areas can cushion the blow and provide stability.

2. Regulatory Flexibility: Zoning regulations, building codes, and permitting processes can vary significantly from one location to another. Operating in multiple markets allows you to capitalize on areas with more favorable regulatory environments and avoid those with excessive red tape.

3. Demand Diversification: Economic conditions, demographics, and housing demands differ across the country. Geographic diversification allows you to tap into varying demand drivers, reducing reliance on a single economic engine.

4. Avoid Oversaturation: Focusing on minor subdivisions in a single market can lead to oversaturation, increasing competition and potentially depressing prices. Spreading out projects across multiple markets avoids this pitfall and allows for more controlled, sustainable growth.

5. Learning and Adaptation: Working in different markets exposes you to a wider range of development practices, construction techniques, and market dynamics. This experience fosters adaptability and allows you to refine your strategies for increased efficiency and profitability.

   
   

Implementing Geographic Diversification:

• Market Research: Thorough research is crucial. Identify markets with strong growth potential, favorable demographics, and reasonable regulatory environments.

• Local Expertise: Partnering with local professionals (real estate agents, contractors, attorneys) in each market provides invaluable insights and helps navigate local nuances.

• Financial Planning: Account for varying costs of land, labor, and materials in different regions. Secure financing that allows flexibility across multiple projects.

• Project Management: Implement robust project management systems to effectively oversee projects in disparate locations.

Geographic diversification might seem daunting for smaller developers, but the benefits in terms of risk mitigation and long-term stability are undeniable. By strategically spreading out projects across the country, you create a more resilient and adaptable development business capable of weathering market uncertainties and achieving sustained success.

In an effort to not contradict everything I’ve written so far, however, it is crucial that you have a full understanding of each market that you’re operating in before expanding to multiple other markets. Since each market has its own set of specific requirements to be successful operating in, it’s more important to get very good at one market completing minor developments before moving into a new one. However, if you are able to learn how to complete these minor developments at a small scale in a few markets nationwide, your likelihood of being able to continue to operate no matter what the economic cycle is is much higher.