Investing Locally or Out of State - Which is Better?
by Christopher Levarek
“It isn’t enough to think outside the box. Thinking is passive. Get used to acting outside the box.”
- Tim Ferriss
Should you invest locally or out of state? That is the question. For many new investors, the mere thought of investing into real estate outside of their local market in an unfamiliar place with no connections sounds terrifying. Yet, this is entirely how many other investors are finding great success.
The truth is that although local deals or local investing appear the least risky or most comfortable, quite often, they simply do not measure up to the vast amount of opportunity across the various markets. It starts as always with deciding what aligns with your goals and having the courage to explore outside of the box.
Out of State Investing - The Curtain Reveal
There are five reasons why out of state real estate investing will greatly accelerate the path to your long-term goals :
Buying right
Having the Big Picture
Outsourcing the Effort
Diversification
Due Diligence
#1 - Buying Right
A very common scenario with investors buying locally, is that they are buying with emotion. Since they live near the investment, they are choosing often based on various “feeling factors” such as being near to their home of residence or down the street from their gym. In an effort to simplify the investment or management of the investment, they are purchasing an asset which might have terrible numbers or even needs a lot of rehab.
Investing in another state does not allow for this. One must rely on data and data does not have emotion. This then requires the investor to invest based on set of criteria or information versus with emotion. Always a better choice in a business plan.
#2 - Having the Big Picture
Real Estate varies per state, per market, per city, per neighborhood….well you get the point. For the investor investing locally, they are simply seeing one piece of the puzzle. The job growth and population growth will be limited to looking at the single local market for example. As we know, real estate is in cycles but did you know some markets peak while others decline?
What if you the investor could choose which markets to be in at the right moment? This is the power of out of state investing. Seeing the entire playbook and choosing the markets that are performing instead of only looking at one single page forced to ride the wave of ups and downs of the market cycle.
#3 - Outsourcing the Effort
Out of state investing requires by default that an investor rely on a team in another state. It requires building a team and leveraging their skills to achieve success. This in itself allows an investor to become a better investor!
The skills gained from building a team or working with others can then be used in numerous other markets. Effectively creating a repeatable process to scale. Additionally, being forced to rely on other team members can align very much with those who are looking to “not create another job” or handle all pieces of the investment.
Local investors typically fall into the trap of doing everything themselves and often can get burned out by the extra work effort.
#4 - Diversification
It goes without saying that if you buy real estate in multiple varying types of markets, you are achieving diversification. If Market A falls, chances are Market B will not fall in the same manner or maybe it instead is on the rise. Indeed, all the market indicators will vary from market to market such as population growth, job growth, unemployment, rent growth, etc.
By investing out of state, one is effectively spreading the risk and protecting their investment from ever-changing market cycles. Investing locally is similar to putting all your eggs in one basket and is in effect, significantly more risky.
#5 - Due Diligence
When you invest into an unknown market, you do so with purpose. You are forced to perform due diligence or research on the market. You learn to understand the good areas, read into the data and perform analysis on the team/property. Communication becomes necessary and building the process an essential piece.
Often in local investments, investors are buying based on gut feeling or because they happened to see the property while driving by. It becomes a purchase based on feeling rather than a researched investment.
In Final
I once heard a great analogy equating investing locally to when your car breaks down on the highway which I’ll share here. Often people invest locally because it is comfortable and they feel adequately knowledgeable since they possibly own a house in the market.
The same comfort occurs when your car breaks down on the highway. You go and open the hood because you feel you know what you are looking at. Yet when that hood pops up, for the majority, no-one actually has any idea what to do next. Perhaps you fumble with the oil cap or wipe some dust of the top of a plastic covering. Then you simply call the auto repair company.
The point here is, it’s important to ensure you invest in a location not based on comfort or an idea that you will handle it all. Every real estate investor should explore investing out of state as well as local investing, just be sure to invest where it makes sense based on the data or “the numbers”.
One Last Thing
If building a team and studying a market out of state sounds like a lot of work, it can be! However, one of the best ways to invest quickly or out of state can be through passive investing into real estate syndications.
In these syndications, the experienced teams are already in place and the market research has been completed, allowing investors to diversify their portfolio in various markets and asset classes with ease.
If you’re interested in learning more on becoming a passive real estate investor, consider joining The Valkere Investor Club.