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Updated over 4 years ago, 04/28/2020
Why Most Of Investors Invest Only In Local Market?
I found that investors are focused on their local market because "they know it" even if return rates are much, much lower than in other areas...
If they decided to be REI, so assuming they want as high return as possible...
So why they not to jump on more profitable market?
My loans all conventional 30 year fixed 25% down, two in Alabama and two in Georgia.
interest rates on those loans (4.25%, 4.37% Alabama Properties) (4.25%, 3.75% Georgia Properties)
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I live in Texas.
@Adam Blachnio what type of return are you talking about? overall return? return from cash flow, amortization, appreciation, tax savings? Reading between the lines of your post I think you mean return from cash flow.
Different markets have different combinations of all the later four types of return and they feed into overall return. Different people's strategies require different returns. Their strategy should be an outflow of their goals, knowledge, skills, and abilities.
Not everyone wants $200/door/month. I have a friend who bought a SFR in a growing area that is cash flow negative for the first tenant cycle, and now is about break even. His goal is to take advantage of amortization and appreciation to have that SFR pay for his kid's college. not everyone's cup of tea, but it works for him
Then there is risk, which goes hand and hand with return, but is rarely talked about on BP. Investing out of state is riskier for the vast majority of people. Thus that higher return could more than be offset by the increased risk to become a wash.
In short, there is more to an investment than the spreadsheets tell you. Some people don't want to maximize returns from cash flow, some just want a safe place to preserve capital. Look at the ghost condos in SF, NYC, LA, Seattle. The investment is a means to an end, not an end in and of itself.
Originally posted by @Adam Blachnio:
I found that investors are focused on their local market because "they know it" even if return rates are much, much lower than in other areas...
If they decided to be REI, so assuming they want as high return as possible...
So why they not to jump on more profitable market?
Define what you mean by high return. I have properties both OOS in the Midwest and I also have properties locally here in Los Angeles. Based on my experience, I came to the conclusion that investing locally is better for me. But just because I think investing locally is better for me does mean I think it's better for everyone else here that lives in So Cal.
I think part of the problem is that folks look at listings here locally and then look at listings provided by OOS turnkey providers and automatically see that on the surface, the proforma CoC is much higher OOS. Thus the return on these properties must be higher in these distant properties. Well then yes.... these OOS properties will of course look more attractive if that is the extent of the effort you want to put in finding the right deal.
But I think the message that @Russell Brazil makes in many of his posts ring true. There is a reason why these properties have higher yields... They aren't located in super-competitive areas where loaded cash investors are itching to make buys.....thus driving up the yield and subsequently the risk. Ever gotten one of those emails from someone saying that they want to unload their Midwest portfolio that they spent a life-time accumulating. LOL, I surely would not want to be that person. The last property I purchased in LA took a lot of effort and I expect that all my future buys will take at least as much effort. I'm also currently in escrow for a new property which took about a year's worth of searching and countless hours of driving around and phone calls. Oh yeah, and I also I put my agent through hell but he loves working with me. It's extremely competitive here...but I love investing here and I know that my portfolio of properties here in LA are high quality and will provide me with good cash flow and good long-term wealth. And if I ever wanted to unload them, it would be in a very competitive market with a lot of wealthy investors.
Originally posted by @Adam Blachnio:
@Elliott Elkhoury
That's why property management companies can take care of OOS asset.
Sure, that's what I do too and invest heavily and exclusively out of state. What I'm saying here is that picking, managing, and relying on a property management company as a remote investor is not necessarily what a lot of people who are newer or have smaller portfolios think it is. Stuff goes wrong, and property management companies perform at varying levels- none of them perfectly. This shouldn't stop investors from going remote and using them, but the investor who chooses management poorly and doesn't ride em will be punished. I see it happen all the time, and I tend to find the investors approach as flawed as the management companies' operation in most of these situations.
Originally posted by @Adam Blachnio:
I found that investors are focused on their local market because "they know it" even if return rates are much, much lower than in other areas...
If they decided to be REI, so assuming they want as high return as possible...
So why they not to jump on more profitable market?
I would be interested in what markets you think rates are much, much lower.
In a free market, the price reflects items such as risk, return, effort, etc. In theory, this implies higher priced markets are higher priced because of a mix of lower risk, higher return, less effort. Conversely, lower priced markets are lower priced because of a mix of higher risk, lower return, more effort.
Most markets you get what you pay for. Similarly, you can achieve RE success in most markets and having intimate knowledge of that market increases your odds of success as well as provides mechanisms to decrease risk. I recommend all new RE investors start local or a location that they are intimate with.
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@Adam Blachnio well, we are all seeking a competitive advantage...and I know people who have done well away from home so I’m not casting aspersions on doing so...But one advantage of real estate is that it can be hyper, hyper local...a particular city, a particular neighborhood, a particular block even can have vastly different opportunities if you are able to recognize them.
It’s one of the few types of investment where a person with relatively few resources can legitimately know more about an area than anyone else, or at least know enough to recognize a particular opportunity where others who are less familiar might miss it. And it’s easier to do that locally.
Having a good strong relationship and communication with your PM that's located in the neighborhood is very good at helping an out of state investor locate a good deal.
Before I buy in one of my two target areas, I always connect with my PM and ask how the market is doing, what is renting there, the going rent price, where and what is in demand?
All 4 of my properties rented out in less than 2 weeks, and 3 of the 4 have had the same original tenants, (one just resigned for a 2 year lease) so low turnover.
All my tenants have communicated their love for the properties they occupy, and the area they are in and that they want to stay long term, which is music to a landlords ears.
@Adam Blachnio it’s what you see on BP as that’s what they preach. As you experience your journey, you’ll notice that the vast majority of people invest locally.
I love local as well because the fact that there are great local hard money lenders in your backyard that will do 100% Financing on real estate deals. I have used the locals way more than the national guys because they are just better and know their market in and out. It definitely helps since you can't see EVERYTHING in other virtual markets compared to your local one. The confidence you get from being local as well boosts your sales in turn.
This is a very interesting topic with various view points. The dilemma I see is the current market I’m in (NYC-Long Island), is similar to the above posters who stated is just doesn’t cash flow and can barely service the debt after accounting for reasonable expenses. Moreover, the barriers of entry are very high. Most 2-4 family homes on Long Island start at around $500k, small apartment 5-15 units can easily break into the millions. Whereas, I have a friend investing out-of-state, roughly two hours away, who has purchased 5-10 unit properties for a similar price point. So an initial downpayment of $75k-$125k can go a lot further in other markets.
In regards to risk and reward, in a balanced market that would be true. However, in the local NYC market you have owners who refinanced after substantial appreciation and self manage. So they will buy what ever they can within their local market. Currently, cap rates on multi-family buildings range from 4.0% to 5.0% in the NYC area. Even after the passage of strict rent control laws in June of 2019. I underwrite these properties all day and most have trouble with the dscr (debt service coverage ratio), which we set at 1.25 for multi’s. We have a lot of NYC investors looking else where. The only investors who are getting big returns around here are value added plays. With that being said, I can personally see why a 7.5%-8.5% cap rate in another area is very attractive. Personally, I wouldn’t go further out that a 2-3 hour drive, but that’s just me.
So my options would be to invest in a two-family locally, have to self manage it and hope to see a 5%-7% cash-on-cash return or invest out of state and see returns close to double that with a property manage taking care of “most” the operation.
@Adam Blachnio
I live in a very expensive Market and invest in the SE. I work w 2 different PM companies and rely on their expertise and local knowledge. Even though I now have a great team it wasn’t overnight and it took a lot of work. Even as recent in December of 2019 I had to make an emergency trip for an issue it’s never 100% passive even w good PMs..
I fully understand why investor invest in their backyard, it’s definitely much easier I had to learn a new market from scratch and it took many trips and lots of time to learn it. If I could I would prefer investing in my backyard but I don’t regret being a OOS investor. I collected 100% of my rent in April not sure if that would have been the case in our current environment if I invested in my backyard...
Originally posted by @Cory S.:
All my properties are not local and I've never seen them in person.
With today's technology and good competent property managers as well, I'm allowed to do this.
Yes there are pros and cons to every situation and no ones situation is the same, but for me it has worked out very well with a nice balance of cash flow and appreciation.
What areas are your properties in? and did you use a turn key company? how did you go about accruing these investments out of state? i, too , have been attempting to invest OOS. Its so hard to choose one area i been all over the map trying to decide.. Any help or insight?
In answer to your original question.... different strokes for different folks.
I am born and raised in NY and I can tell you I do not invest here (outside of an occasion couple of small deals that fell on my lap). The numbers make absolutely no sense where I am and it was a great decision to invest out of state. With proper systems in place and good teams you can acquire great performing assets.
@Avery Carl great insights on investing outside of the market we are familiar with. Especially when our local market isn't one that will have high return rates.