Some of the most successful real estate investors you’ll ever meet will tell you one thing: Invest where you live. This is the advice I give to my students, especially if they’re newbies. Though you may hear about hot areas a hundred miles or more away, think carefully before investing there. Why? Because it’s difficult to gain thorough knowledge of a market area if you aren’t living there. And even if you can get a snapshot of knowledge that can carry you through a successful purchase, you won’t be around to notice the nuances of change that could signal the need to sell before problems set in.
Another obvious argument for investing where you live is that it gives you the ability to watch and manage your properties – a task that is neither easy nor inexpensive when they are a distance away. And that’s the argument most seasoned investors focus on.
Still, I know from experience that investing in far-flung areas can be profitable.
For example, I live in Arizona. But not long ago, I invested in properties in both Iowa and Illinois – more than a thousand miles away. At the time, job growth was strong and rental income was going through the roof. I have a student named Matt who lives in the Iowa/Illinois quad city area, and I partnered with him on a few deals.
A local quad city bank noticed that we were buying houses and came to us with a commercial property valued at $2.5 million. The bank had it in foreclosure, and wanted to get it off their books. They made us an offer that included a 5.5 percent interest rate for five years. One-third of the property was already rented to tenants, and the bank agreed to rent back the remaining rental space for us. After our back-and-forth counters, the sales price came down to $1,596,000. Right now, we get a cash flow of 20K a month, with the bank renting out the space. Once we get tenants in at market rents, our cash flow will more than quadruple.
Another deal Matt and I partnered on was a bank-owned foreclosure valued at $400K. We made an offer of $162K, they countered, and in the end we got it for $164K. The current market value is more than twice our purchase price. We can rent it or list it. Either way, we make a super profit.
If you know and trust someone who understands a “long-distance” area you’re considering investing in, he may be able to help you gain – and maintain – the very thorough knowledge you need to make smart decisions. That would include an understanding of these five market factors:
Long-Distance Investing Factor #1. How does your market relate to the big picture?
Location is always important. Even in an economic downturn, certain areas of the country can be extremely attractive because of such things as job availability. Watch national real estate price indexes like the Case-Shiller Index and the OFHEO (Office of Federal Housing Enterprise Oversight) Home Price Index. When these indexes are improving or looking bleak, what are the factors causing the rise or slide? Are they factors that can also influence your micro-market, be it a neighborhood or a city?
Long-Distance Investing Factor #2. What makes your market special… or not?
You also need to ferret out local trends or strengths that make your market area different, unique, or robust. Is industry or commerce moving in? What will keep area values strong or appreciating?
Neighborhoods with a strong job base fare well even in a bad economy. Baby boomers needing healthcare keep communities that surround medical centers hopping. Companies that are going “green” are also attractive to live near. Is the local government providing tax incentives to lure business? There is a trend for people to want more clean, open space in their environment. Is your market area moving in that direction?
Be thorough and objective in your analysis, as it can make the difference between success and failure.
Long-Distance Investing Factor #3. Is local government helping or hurting your chances?
We touched on this in Investing Factor #2 – but, other than attracting new businesses and planning for more parks and green space, there are ways in which government, or even subdivisions, can influence market direction. In particular, there is a tendency for people to resist change, to maintain what they have even if it means throwing up obstacles to prevent growth in certain residential areas. This can sometimes be good for prices, sometimes bad. It’s hard to predict which.
Here are some of the requirements imposed by governments and associations that added to the cost of building and, thus, helped prices rise during the real estate boom:
- An increase in minimum home sizes
- An increase in lot sizes
- Forcing builders to reserve green space
- Requiring wider streets, more street lights, etc.
Ultimately, requirements like these usually slow or impede growth. On the flip side, you don’t want to see rampant growth allowed, with poor zoning and little attention to quality of life, traffic, and safety issues.
Long-Distance Investing Factor #4: What do the numbers say?
Real estate investment requires a great deal of diligence in analyzing purchase price versus value, rental outlook, and other financial factors. What are the rents maxing out at for comparable properties? What are these other properties experiencing in the way of vacancy rates or non-payment of rents? What are existing capitalization rates? (The cap rate is the ratio between the net operating income produced by the property and its original price or its current market value – and it is an indirect measure of how fast an investment will pay for itself.)
Are there condition factors that might be important? Are many of the multi-family properties in the area in poor condition or lacking amenities wanted by today’s renters? If so, that isn’t necessarily bad – especially if you’re going to end up with a property that is in much better condition than others in the neighborhood.
Don’t do the numbers only on the property you are considering. Have a firm grip on how your potential investment’s numbers fit into the local market.
Long-Distance Investing Factor #5: How firmly are you planted?
We started this discussion with the importance of investing where you live. And when you have a long-distance investment, you are, in a sense, “living” there. So, how does the area appeal to you? Add a sheet to your diligence file. Make it a pro and con assessment of the area as it relates to your own quality of life. If the other four market factors look good for a particular investment, knowing that you wouldn’t mind being there for some time to come could seal the deal.[Ed Note: If anyone knows about the pitfalls of real estate, Dean Graziosi does. He’s a real estate expert, teacher, and author who’s been investing since age 18! His book Be a Real Estate Millionaire is a New York Times, Wall Street Journal, Amazon.com, and USA Today best-seller. For an ETR-reader-only special on this book, go here.]