One of the most common questions I get asked is:
“Should I invest in my home market, or out of state?”
Today we’ll talk about the pros and cons of both and help you decide where you should start investing in real estate. I own over $25 million in real estate and I personally have struggled with this decision before. I’ve come up with a good way to help you determine what would be best for your situation.
First I want to share an example that will help with a lot of decisions that you make, but especially when it comes to what rental property you should buy and where you should buy it. Here’s the scenario: you’ve got two cars and they’re both under sheets so you can’t see them. One gets 45 mpg and the other only gets 12 mpg. I’ll raise the sheet as soon as you pick one and give it to you for free.
Most people will say the 45 mpg car. Maybe that’s because the first thing they can think of is the importance of good gas mileage. The problem is, you’ve only been given one statistic to make this decision. When I pull back the sheet, the 45 mpg car is a jimmy-rigged Toyota Corolla that is about to give out with 200,000 miles on it. The engine is shot, tires are shot, it’s worth maybe $2,000. The 12 mpg car is a Lamborghini Aventador. It’s worth $417,000 and you just turned it down because you were focused on gas mileage.
Often when people are making a decision, they are doing so with limited information. Sometimes it is self-inflicted because they are just focused on one thing. The point is that every situation is different. Sometimes you’ll hear that one area has incredible cashflow, or another town has incredible appreciation, or you can find a super cheap deal. If you focus on one criteria to make your decisions, you’ll find that a lot of times you’re going to get burned.
For you to think that both cars behind the sheet are probably equal before seeing the cars is also a foolish thing to do. On the other hand, sometimes people will say “any market is a good market.” That’s just not true either. We can prove that cashflow, appreciation, all of these things are better in some markets than others. There are markets that you should definitely not invest in because odds are that you’d have a higher risk in that area. However, there are also certain things that you can do to do well in a bad market by leveraging your situation.
The biggest lessons from this example: don’t jump to conclusions and be willing to look at your whole situation and the situations around you before jumping to a conclusion because of what someone said. A red flag should go up if any one person tells you that you should do exactly what they’re doing. You’re a different person. Your values are different. Your financial situation is different. Your credit score is different. Your skill set is different.
Going into this decision of whether to invest in your market or another market, you need to look at the big picture.
First, let’s start with the pros of being your own market.
- Check on the property. You can personally and consistently check on the property. You can drive by. You know the area. You’ll know if a major business just went out of business which might affect property values in the area. You know if a major business is coming in. You can do your research on all of these things in another market, but for me I was raised in my market, was very comfortable in it and didn’t have to do a lot of research to know what was happening in the area.
- Connections. I’ve got lots of connections in my area. Other investors, realtors, wholesalers, etc. I’ve gained these relationships not just because I’m a real estate investor but because I was raised in the area. That makes it very easy to get the right connections. I can ask around and find the best credit unions with the best rates, the best property management company, who is the best subcontractor for XYZ. It’s been advantageous for me to have so many connections that have already been built. It saves me research and time in building new relationships, new teams, and new systems in a different area.
All the pros of your market are things that can be duplicated, it’s just going to be a little more difficult or time consuming to do some of these things out of state. If you’ve got all these connections AND your market meets the criteria where it makes sense, then it’s probably best to go in your market.
The one time I would tell people to not look in their market is if they don’t have these connections and their market is bad. Or, if their market is so extremely bad that even having the connections doesn’t make it worth it because they could go get new connections and build a new team somewhere else.
The go-to market to pick on would be the majority of the markets in California. They’re so saturated, prices have gone up so fast. People are willing to pay almost anything to where they’re not cashflowing well and overall, as a whole, that market just doesn’t have good deals.
If you’re a realtor who has built thousands of relationships in an area, you’ve got connections with all the wholesalers, all the realtors, and you can get the best deals in California, those connections can offset the negatives in the market. The market is so incredible with appreciation and people are willing to buy your property for more when the time comes. So if you can get the best discount in a competitive market that isn’t great for cashflow, appreciation, etc. that is a great reason to invest in your market because those pros give you an advantage that you already have.
These are the major pros to investing where you are, but you’ve got to look at your personal situation. People will come to me and say they don’t have enough money or connections to invest in their hometown in California, but it’d be nice to be able to drive by and check on the property. My response is that it doesn’t take a lot to pay someone in another town to get on FaceTime and do a monthly walk through with you on a property. Even once a quarter is plenty. Any time management charges you for exorbitant amounts on renovations or expenses, you can have your guy go over and FaceTime to show you what they did. Or if you trust your management company, you can just have them show you on FaceTime.
Now let’s do the pros of investing out of state:
- Don’t poop where you eat. If things go wrong in your hometown with a bad eviction, a messed up renovation, or your management company does something wrong, you have a higher standard that you are held to in your home community. That can be intimidating. Not that you would do something wrong in another state, but it’s just added pressure to do things right in your own market. In another market, you’ve turned it over to a management team and it’s not necessarily your name behind that investment. In my town people know what I own and if they think the yard looks like trash, it can come back to me.
- Blind to what else is out there. I got lucky when I decided to invest where I live. I’m in a market with great cashflow, great appreciation, low crime and all the things I would look for in a dream market. Now that I’ve looked into other markets, I know that there are some that have potential advantages when it comes to cashflow, appreciation, a lot of those things that I look for in a property. If I could have my same team and deal flow in one of these other markets, it would make a ton of sense. That’s the biggest takeaway for today:
if you don’t have the pros in your market, some other market does have all those pros that you are looking for. There is a difference between the cars under the sheet. You might be in a Corolla now where you live, where somewhere else you could have the Lamborghini. With really creative deal finding, creative financing, and strong connections, people do overcome a bad local market. Reflect on your market, do the research, look into the cashflow, vacancy rates, appreciation, trends, what’s drawing and keeping people there.
Get to the point where whatever market you’re looking at, you’re comfortable with your desired return. If you’re thinking that it’s easier to invest in your home market but you know you could be making a lot more money in a different market, don’t be scared of putting the right system and checks and balances in place. As overwhelming as it sounds, you’ll find a new loan officer, inspector, and management company. Make sure that they have good subcontractors, optimal vacancy, good cashflow and appreciation. It will take time and research.
For me, one reason I’m looking outside of my market is deal flow has been a little harder in just my area. Having multiple places where you have connections will allow you to scale more quickly with more opportunities to find good deals. The only warning: a lot of times you simply don’t know what you don’t know. If you’re just relying on someone who told you that some market and some deal is good, you might get lucky. But you need to have your own research, your own set of criteria, your own checks and balances and systems. Make sure that those are all in place before you ever go invest out of state. When you’re investing in an area that you don’t know with people that you don’t know, there is risk. There are bad people, bad businesses, and bad deals. Make sure that you do your due diligence.
What would I be looking for? I want to go a place where:
I know it’s a B+ area. This is especially important out of state. I want to stay away from the trash with high vacancy, high eviction, high expenses. That’s now what I want to deal with in a different market because it’ll be handled by a management company. If they’re constantly dealing with vacancies, expenses, evictions, etc., there’s a lot of issues that can arise.
There is a track record of good appreciation. Property values are going up and there are enough businesses to support it. If businesses come and go, you don’t want to be in a problematic area.
The area benefits landlords. There are lots of areas out there that are moving toward not benefiting landlords. Many states are going to do things that make business harder for landlords. It’s going to make it harder to bump rents, evict people, and other advantages that another market would provide in a landlord-friendly state. Make sure it is a landlord approved market.
Costs are low. Make sure that taxes and insurance aren’t crazy high.
No natural disasters. Think about whether your property is going to constantly be torn down by tornadoes or storms or other disasters that will cause additional work and stress dealing with insurance companies.
The market has my desired cashflow. For me that’s a minimum of 12% cash on cash return on my investment in that property.
These are a few of the criteria that I look at. You’re going to want to do a deep dive on anything that could change that situation. Make sure your numbers are good. Take the time to understand rents in the area so you don’t have to take the seller’s word that may or may not be possible. So many people get burned where a deal sounds incredible when they’re told rents are a certain amount but then the property never pulls close to that amount.
That’s why it’s so important to understand what the market rent is for the area. You could get lucky and fill it for higher. That can happen, but you’ve got to base your decision on market rent. You could have a property that’s only worth $300,000 but if someone doubles the rents and sells it for $600,000 because they temporarily had a tenant paying way more than they should. People can sell way under or way over what a property is actually worth. You need to do the research so that you’re confident you know exactly what it is worth.
I would sit down with the management company before buying a property. Have the team in place, know that you have financing lined up. Call the management company and ask them to show you comparables for the rent for units in that area. Then you can confidently say that rents are good and the deal makes sense. Just make sure you are going over the top on doing your due diligence.
Don’t be scared to invest out of state. They could be the same but you could get a much better return in the right area if you do things right, have the right systems, do your research, get a good management company, and have all the checks and balances in place to check in on those systems and that management company. If you can do all that, you’ll be absolutely set.
If you want a step by step process on exactly how to invest in real estate, what to do, what to look for, I created a real estate investing course that goes through all of that. Buy the course if you’re ready to dive in and want to go step by step. My goal is to help you build a huge passive income.