diff --git a/docs/upgrade.md b/docs/upgrade.md
index d604c4b507..f7a6e8872b 100644
--- a/docs/upgrade.md
+++ b/docs/upgrade.md
@@ -32,7 +32,7 @@ Upgrade uses the latest Kubernetes version considered stable by kops, defined in
 
 * `kops edit cluster $NAME`
 * set the kubernetesVersion to the target version (e.g. `v1.3.5`)
-* NOTE: The next 3 steps must all be ran in the same directory
+* NOTE: The next 3 steps must all be ran in the same directory. Here, `--out=.` specifies that the Terraform files will be written to the current directory. It should point to wherever your Terraform files from `kops create cluster` exist. The default is `out/terraform`.
 * `kops update cluster $NAME --target=terraform --out=.`
 * `terraform plan`
 * `terraform apply`