REAL ESTATE INVESTING OUT-OF-STATE OR IN MY BACK YARD (LOCALLY)?

If you’re seriously asking yourself this question, congratulations! You are already starting to think like a true real estate tycoon.

While this question brings up some feelings and emotions, I’m going to revert back to a classic MBA-graduate answer on this very broad topic: “it depends.” I’ll put a disclaimer here for you to get used to this answer, since we’ll be exploring these two little words in many of my posts and content.

There’s separate factors to consider here that we’ll look at individually and then wrap it all together toward the end of the article.

Experience & Financial Foundation

If you don’t own your own personal residence, I would highly recommend that you look into this for your local area, especially if you decide that you’ll want stay put for at least 5 to 10 years. A tool you can use to help give you a gauge on this can be found by simply googling it, or take a look at NerdWallet’s Rent vs. Buy Calculator.

The advantages of owning your own home include:

• Appreciation. Especially if you live in an expensive market.
• Equity buildup in your property over time.
• Leverage can be tapped into in future years with refinances or lines of credit for emergencies or investing.
• Control. You can improve or rent our portions of the house, or live in it without a landlord controlling terms.
• Tax benefits of depreciation and write-offs.
• Resiliency. By owning your own home over a reasonable period of time, you have proven that you able to handle hardships and bumps in the road as they come.

There are disadvantages to consider too, like the obvious illiquidity of your cash, maintenance items on the house, etc. Investing in your own personal residence will give you a firm basis to stand on, but again, does not give us considerable weight when considering to invest in property within your state.

If you already own your own home or live an area where it’s extremely expensive or have other good reasons for not buying your own personal residence, it may be time to look outside your market.

Market Dynamics

Consider the markets in your back yard within a 1-2 hour drive. Now also think of another market outside of your state. At a high level, how do the two compare to each other in terms of:

• Climate. Where you live, will it be required to have A/C in all of your units? What about humidity (which could lead to mold and pest control issues)? Do you have to factor floods, tornadoes, hurricanes, or risks of fire into your decision making?
• Laws. Are the courts in favor of landlords or tenants? What are the eviction, deposits, and “notice to enter” laws like in this market?
• Industries. Is there a diversity among employers or is everything dependent on a single sector, such as a military base? Do you live in an area that goes through manufacturing or oil & gas booms and busts?
• Politics/ Local Leadership. Are the leaders willing and capable of embracing growth? Are they tough or lenient on local businesses in terms of restrictions or taxes / business fees?
• Economic Outlook. What has they last decade looked like in terms of household income per family in your area? Have home prices increased? Has both rate of job addition and unemployment beaten the national average?
• Market Cycles. Where is the market in terms of its local market cycle? Have national cycles influenced or caught up with the area, or are you noticing a lag?

Risk Tolerance and Appreciation vs. Cash-flow

While the topic of investing for value increases (appreciation) versus cash-flow is broad enough on it’s own, we’ll not get too much into that here. Just know that each investor, including yourself, has a preference somewhere on this spectrum. If you local market’s offerings do not line up with your goals and approach, it’s time to look elsewhere. Don’t let where you live hold you back from finding your ideal real estate investment!

Another factor may be affordability for you in the first place. If you live in a state in which home are expensive (and is mostly an appreciation market), selecting a non-local market to fit your investment and risk tolerance could be right for you.

A risk-averse investor may think that investing outside of their area is more risky, but that is not necessarily the case. With the right team, experience, and approach, a portfolio of cheaper single family of small multifamily properties very often are more stable and outperform more expensive houses with the promise of appreciation.

Jumping into an out-of-state investment as a passive investor on a larger multifamily property may also be a fantastic choice. In this way, the risk-adverse investor can purchase property out-of-state with much less headaches as the operator has the experience to deal with them for you.

Personal Ties & Familiarity With Out-of-State Markets

Do you know anyone who lives in a strong market? Did you grow up in a town that has since exploded with growth? My friends grew up in Los Angeles, CA and Austin, TX, and Colorado Springs. Since then, these markets have exploded in growth.

Think back to some cities that you have moved out of or know well. Perhaps you have family that still live there! When you have these resources or experiences at your disposal, you can take advantage of this in your real estate investing path, considering:

• In-person visits become extra productive. If you visit a place in which you have an existing network, you get many advantages. Among those is the ability to stay with family and friends, cutting the cost of lodging and food drastically to do your work there.
• Your network can act on your behalf. You can have your network there do things for you if you have supportive people willing to help. They can drive by properties, meet with people, and even eventually partner up with you.
• Your network can to introduce you to existing connections. Being introduced by a mutual contact (such as a banker, investor, agent, etc.) is one of the most effective ways to building trust in real estate investing and can give you a competitive edge.
• Trips are tax deductible. If you go out to the market to view property and visit with friends and family, you can write off the travel going to and from the market and the days in which you were conducting business (consult your CPA on this!).
• You should be at least somewhat familiar with city sectors. This can help you identify pockets of opportunity to watch in your investing and helps narrow your focus (which gets results!). This knowledge will give you a head start on underwriting. It will also give you an edge over other out-of-state investors by enabling more intelligent, targeted, and focused conversations with local professionals.

The Returns & Achievable Numbers

It would be irresponsible of me to not mention the main purpose in which we are investing. The cold, hard returns! While it isn’t everything (and paying attention to projected numbers and metrics alone can send you to your ruin), it is critical to know what returns and financial performance to expect. Here are some 

of the terms that you should know for a typical property you would purchase in the target sub-market of your selected market:

• Cap-rate. How hard is the money you are planning on spending working for you? What is the market and your selected sub-market cap-rate targets?
• Cash Flow. How much are you making by holding the property? Whatever it is, it better be a positive number and not negative eac
  h month!
• Outlay. How much are you willing to spend on acquisitions and any construction? Is this realistic and do you personally have access to the outlay you’ll need without risking your own personal financial situation?

That's Great and All... But What Do I Do?

Well, there’s quite a bit to take into consideration! Choosing whether or not to invest locally or out of your back yard is an important decision to make because most likely when you pick a market, the momentum in the market that you chose starts to build when your team is already in place. For that reason, it’s a serious consideration that might put you in that market for the long term.

There are advantages and drawbacks to investing locally or out-of-state. So ultimately in the end, it comes down to your situation, your market, and the market you are comparing it against. I’ve prepared a matrix spreadsheet for you to fill out to help guide you with your decision.

A snapshot of the matrix is included below.

You can find a copy of this spreadsheet (editable after you download or copy it) at the link here!

We hope this was useful for you own adventure in real estate investing. After completing that spreadsheet and giving this some thought, feel free to reach out to us to discuss this further.