Many investors find that one of the biggest problems isn’t finding a great investment; it’s when they find one long-distance that isn’t in close proximity to where they live. What do you do when you find yourself in this situation? Do you invest in the property, or pass? It is far more important to invest in a property that you’re within a drive’s distance of. You’ll see lots of articles that rank real estate investing based on:
the top states and cities where the market is doing well
the very best states for property appreciation
any activity regarding foreclosure in the area
the days on the market, or, DOM
the rental rates for the any given area
It can be quite hard to resist comparing that data to yours. However, it isn’t a great pattern of practice to do so. Usually what will happen is you’ll feel that your area isn’t the best investment and that perhaps you should either move cities or states, or invest long-distance. This is a trap that many investors fall into. So, what’s an investor to do? Sometimes the answer isn’t always so clear-cut. Below are some considerations that will help you decide if you should invest near or far.
It’s human nature to always think there’s something better than we’ve got
The “grass is greener” syndrome is real. It comes down to basic psychology. What you need to understand in life, is that the grass is typically not greener. That almost always rings true. Bringing it back to real estate, many real estate agents or investors think negatively about the market in their area. Perhaps they aren’t finding any good opportunities, or aren’t selling any houses. Usually this has not much to do with the area itself, and more to do with wrong thinking. Think creatively! Once you start thinking out of the box in terms of real estate, you’ll notice a huge difference in your business.
It can be difficult to become educated at real estate
One of the reasons for this is that just about other agent or investor you speak to isn’t going to be very helpful. This isn’t because they aren’t nice, but they are competing with you, so they have no reason to be over-enthusiastic in terms of sharing what’s going on right now in the market. It would be foolish if they did. If you ask how it’s going, chances are they won’t give you a downright negative response, they’ll give you a so-so response. One that sounds something like, “business isn’t bad, but it’s not booming either.” In real estate, you fend for yourself. No one has a boss. You make what you sell on your own. Therefore, the people in your field aren’t going to be quick to share information with you.
In fact, if another agent is optimistic about a certain area, or is telling you how well the area is doing, and that it’s a wonderful place to buy into right now…err on the side of skepticism. It’s highly possible that they’ve got a listing or two in that area. Tip: after you speak with an agent or investor and they tell you whether a certain area is doing well or not, take a look at their listings. It can’t ever hurt. Agents are going to either play up or play down a market, depending on how either might work to their advantage.
Real estate is different in every area
What, exactly, is meant by this? This means that each city has many different landscapes. This means that within one city, you’ve got the wealthy area, the middle-class, and low-income housing. Therefore, a realtor is making excuses for him or herself when they say that “the market is terrible.” There is absolutely no way that every single area in the city isn’t doing well. At any given time, one particular neighborhood is taking off, or another market is going up, and the other market down.
If one market is going up while another is going down in value, it can be easy for the news report to say “here are the cities within the state that have the highest current level of appreciation.” That typically is when the reader thinks to themselves “Well wow. I could really do well there. Maybe I should move, or start investing in that area.”
By the time you move, that particular market may be totally stagnant. And, perhaps the one that you just moved from is now booming. The real estate market is similar to playing hopscotch. You go back and forth, back and forth through different areas each time. Trying to chase the market around the country isn’t going to do you any favors. The grass always seems greener.
The best opportunities are usually right in front of you
Usually the gem is in your own yard! It can be pretty tough for the average real estate investor. We aren’t talking about the big-timers like hedge funders who are purchasing thousands of houses a month. They’ll come out even in the end most of the times, because even if some don’t work out, others are sure to, thereby equalizing their playing field. But, for the average real estate Joe, you’re going to be tempted to buy into the news chatter about the regional market thermometer. Keep in mind, with real estate, you only need one buyer; not thousands. So, don’t be too concerned about what you read or hear in terms of current market status and predictions.
Why is being local so useful?
Familiarity: Investing locally can be a good thing. For example, perhaps you hear of an opportunity to invest in a huge strip mall for a great price. If you’re local, you probably read in the paper that there have been tons of shoot-outs the past month, and the current owners want out. If you weren’t local, you’d have no idea and potentially purchase it only to get screwed. Just because something is in a great area for a great price, there might be a catch. Sometimes, you’ll never know what that catch is unless you’re local.
When you’re local, you have a huge advantage on the market. Actually, we usually don’t realize just how much we know about an area since we’re so familiar with it. This is often taken for granted when it comes to real estate. Don’t underestimate the power of locality. Aside form the fact that managing a property from out of state isn’t necessarily a breeze. It comes with a whole slew of challenges.
You’ll typically find that where you run into trouble is when you face the type of property that real estate investors (or companies) will purchase, renovate, fill with a tenant, then sell it to someone who lives far away. The reason that these properties are called “turnkey” properties is that they also become the property manager after they make the sale.
It ends up in a disaster. What happens is that the new owner doesn’t live in town; therefore, they have to rely on the property manager to handle it. It’s hard to keep a rental property occupied even when you do live there. Also, if you’re physically there, you can see what problems are actually going on. Actually, one of the best things you can do if you’re going to do something like that, is do a “rent-to-own” buyer rather than renting to a typical tenant.
The reason is that you get money right away; this will help you if the tenant decides to move, and leaves your place in terrible condition. Property managers simply are not going to offer that type of service. Just know that property management from out of town is very, very tricky.
The likelihood of keeping the property rented, in good condition, the value being at the top when and if you decide to sell, and any and every lease going smoothly, is not what’s going to happen.
Nothing compares to your physical presence
It is paramount that you realize that being familiar with the area, and having a good management system in place isn’t going to be enough. You’ve got to literally be there. Yes, you can accomplish a lot in real estate investing just from your computer at home. But it isn’t going to get you as far as you want to be. You’ve got to physically keep tabs on the property.
In the beginning, you’ve got to meet with the home inspector, be present with the appraiser to deal with the utility bills (if you’re trying to flip the house), and you for sure better be in town when the contractor is working. People get badly scammed even when they’re physically living at the house; what, exactly, do you think will happen to you if you buy a property out of town? Contractors lie. Contracting is among the most unethical job professions. If you’re there, you can see what’s actually going on. You want to meet a tenant before they move into your house. It’s only in person that you can tell if they’re going to be a catastrophe to work with or not.
You don’t property managers filling your properties for you. Don’t get us wrong, property managers are incredibly useful, convenient, and can make your life a heck of a lot easier. However, usually a property manager is ten-percent of the lease total, and around half of the total profit. This means that usually they’re making more money out of the deal than you. The property manager doesn’t care if the tenant destroys your house. He cleans up the mess in terms of meeting with the people that will fix it, and following the eviction process. But it’s not his house, and he doesn’t have to deal with the financial repercussions of a horrible tenant.
Locals have an advantage that out-of-towner’s don’t
By investing locally, you will be able to see the opportunities that others don’t have the advantage to see. If you’re investing long distance, you won’t be able to have that luxury. Realize that you do not need to invest long distance in order to be successful in real estate. Don’t buy into anything that you can’t hop in your car and get to quickly. You need to be close enough to where you can stop by the property when you need to, see how it’s going, or handle a quick issue.
Also, when you buy something long distance, it’s hard to find and keep a solid list of workers that you’ll need. For example, even if you have a great contractor in that area that you’ve used for ages, what happens when he moves? You’ll be riding on prayer that he’s good. Homeowners get so ripped off by laborers when they live out of town; but it’s too easy for them to get ripped off.
Is there ever an exception?
There are times where investing long distance can make sense, and may even be a smart move. There are some exceptions. If you want to buy a vast amount of real estate, it does make sense to use statistics on the market to find the right places to invest in. One of those exceptions can be short sales; but notice the word can be an exception. For the most part, it’s much easier, and you can make more profit, by selling locally. There are pros and cons to each; so wouldn’t you rather deal with less cons, when you can make just as much money at home where you live? Thought so. To make money in real estate investing, adding different zip codes to your real estate portfolio is really not that necessary.
How do tax liens factor in?
Here’s another area where investing long-distance can be tricky. In some places, you can get a higher rate of return on the tax lien. In order to do that, you need to know the property that you’re getting the tax lien on. It’s possible that you could take an airplane to go figure out the tax lien option; perhaps it’s online. The fact is, you usually want to be present for the process of these things.
The bottom line is…invest locally. Buying properties out of town can work in some instances; but for the most part, you’ll make the most money where you live. Some of the best deals out there are right in front of you. Get creative!