Tough Local Market? 3 Reasons Investing Out of State Is NOT the Solution

We’ve all heard the saying, “The grass is always greener on the other side of the fence.” What some of us don’t realize is that, often when you hop the fence and take a closer look, you discover that the grass is exactly the same—the difference was an illusion.

The same can be said of buying properties in markets outside your local area. I hear the idea of going far afield to invest all the time nowadays.

“The market in X location is just too competitive.”

But if you think doing deals a thousand miles from home is where the gold lies, you might want to take a closer look.

In an uptrending real estate market, common wisdom suggests that in order to cashflow, you’d better start looking for deals in distant lands—anywhere housing prices are relatively low.

In my humble opinion (one developed over 30 years of investing in the greater Washington, D.C. area, which is very high priced), I believe I can disprove the common wisdom.

It might appear that snapping up a deal in a small, obscure town would make sense. Properties far cheaper than those in a current high-end market take less of an investment. And because the price is lower, you can make money with a lower rent.

On the surface, this seems true. But allow me to illustrate three reasons this train of thought isn’t necessarily your best course of action.

3 Reasons to Stay Local When Investing in Real Estate

#1: Risk

One of the keys to becoming a successful investor is having an intuitive understanding of the market in which you’re investing, right? Can you really expect to fully understand a market 1,000 miles away from you—in a part of the country you’ve maybe never been?

When you invest out of state, you have to develop an investing team in this far away land to help make up for your remoteness. And just to put the cards on the table… who will they truly be looking out for? You or themselves?

#2: Competition

Competition isn’t a bad thing; it’s healthy. It keeps everyone “on their toes,” keeps prices down, and keeps values high. Yet, when you try and invest in a “foreign market,” you’re competing with local investors who have one major advantage over you: intimate local knowledge and relationships.

They know the rent rates, sales prices, local economic trends. They know local agents, brokers, appraisers, lenders, and more.

All this means you’re going to have to work two or three times as hard just to stay in the running.

#3: Cheaper isn’t always better

Let me explain this with an example. Suppose that in your market, an average bread and butter home costs $300K. But you learn that in Lizard Lick, Ark., the same home costs $75K.

“Great,” you think. “I can get the same place for 25 percent less.”

Hold on, though. Consider something important: why is the home so much cheaper?

Real estate prices and rents tend to follow very closely on the heels of local economic realities and trends. One reason some areas are so expensive is that the local economy is strong. There are lots of high-paying jobs, top-end schools, and other factors that drive up desirability.

Conversely, low-cost markets may be suffering from a lack of these factors.

In Lizard Lick, let’s suppose, there aren’t many high-paying jobs. So, while you could get that house for $75K, the local market only supports a rent of $650 per month.

Meanwhile in your area, you could rent the same house for $2,600 per month. Proportionally, the rent/price ratio is similar (0.87).

Which leads me to my next point…

In my experience, appreciation delivers the biggest profit. If you are honest with yourself, you’d probably agree that not all markets appreciate the same. So, which market do you think is subject to better appreciation, Lizard Lick or yours?

Let’s say all things are equal and both markets appreciate at the exact same rate (highly unlikely). If you hold each house for 10 years and both houses appreciate by 25 percent in that time, the Arkansas home will be worth something like $94K, while the more expensive home in your area will be worth $375K.

In my opinion, the effort, energy, and money you’ll have to spend, in addition to the added risk, will at best make investing far away no more profitable. Plus, it’ll cost you time and money that could be spent in your own backyard.

Remember that you know your market intimately. You can develop long-term relationships with an investing team locally. These people will help you invest, and you can have a real face-to-face, handshake relationship.

The Bottom Line

There are lots of ways to make money right where you are. I’ll go into detail about them in other pieces, so keep checking back for more in-depth discussions!

Let me leave you with one final thought: Even if you really do want to go beyond your neighborhood, you don’t have to travel far. Often you can look an hour or less away from where you are and find an entirely different market, different economic situation, different property types, different people, and more.

In doing so, you’re still not so far away that you can’t develop an intimate knowledge of the area and the quality relationships you need to succeed. So, start where you are! Remember that there are always acres of diamonds right under your feet!

Are you currently looking into different markets? How far away? Why? What do you think about my arguments against doing so?

Let’s talk in the comment section below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.