Investing in real estate close to home vs long distance is a common concern for many real estate investors. Should you invest in the areas that have the best performance statistics or simply focus on investing in your own backyard? Oftentimes, news articles rate the top cities or states for appreciation, foreclosure activity, days on market, rental rates compared to average sales price or any other number of market details. It can be tempting to view your own local market as being inferior to all the opportunities that abound in other areas. How should you determine where to invest? The answers to these questions are explored in great detail in the following video:
It's the question of, do you invest close to home, nearby, where you live, or do you invest far off, somewhere else?It's definitely misunderstood. I want to talk about why it's misunderstood, and where do the confusion and the confrontation comes from. Also, what I believe to be in most cases the best approach as well as some of the exceptions to the rule.
Where Does This Question Come From and Why is it Not so Straightforward?
In general most people believe the grass is greener somewhere else down the road.
They believe that their current situation or what they currently have isn't as good as other there. That's just a basic human psychological tendency, which I don't know why it's built into us, but so often people think the grass is greener. In most cases it's not, okay?
Now there's more to it as well. I think in general, most people who are familiar with their local area tend to look more to the negative or the not positive side of things, so where they live, they think, "Well, there's no opportunity around here." It's probably because they've never looked in the right way. A good example would be kaleidoscope thinking. It's the idea that if you turn the kaleidoscope, you see things totally different. It's local familiarity that can actually be a hindrance because someone is looking through a different lens, and they don't see their area in quite the same light.
Hard to Gain Knowledge
Another thing that comes into play is, if you ever networked with other investors or real estate agents or what I would consider competitors, anybody else who is investing in real estate locally, often times they're not going to be extremely outgoing about sharing all the wonderful opportunities that are available. Usually it's more like, "Well, they kind of changed things around here. Really hard to sell a property." That's what you're more likely to hear. A lot of it is because they would rather you not be in the market, maybe, because if you are, you're a competitor.
Certainly, if you reach out for local knowledge, depending on their angle ... Maybe it's a real estate agent that just wants to get a commission and maybe they tell you it's the greatest place to buy real estate in America. It just depends on their angle and what their agenda is, but in most cases people, when you network with other competitors, other investors, they're probably not going to act as positive because it's not in their best interest to act positive. When you combine all this, you got the local familiarity, you've got this grass is always greener, you've got your local competitors usually painting a negative light on the situation; you also have news. News tends to be macroeconomics.
What do I mean my macro? Macro meaning overall, big, versus micro. Real estate is very localized, and so even within a city, there can be so many different landscapes. You can have the ghetto, you can have the wealthiest part of town, you can have middle class, all these different areas of a city, and so whether the overall general market is going up or going down, one particular neighborhood may be booming. Another one may be actually going down in value. It's very localized, so what happens though is the news will say, "Well, these are the four states that have the highest levels of appreciation."
Then somebody will read that article and go, "Wow. I need to be investing in that state." It's not quite that simple because buying a house in a neighborhood is not necessarily going to be indicative of the way the whole state is going. It's very localized. In fact, I would argue and I'm sure I'd be stepping on some people's toes when I say this, but if you're trying to chase different markets, which one is going to be doing better the next year the next year, I equate it to changing lanes in traffic. If you ever done that, you're like, "That one is doing a little better" so you change lanes and then that lane stops, and the one you were just in starts going. I think trying to chase different markets in most cases is pretty much futile and I know I'm stepping on some.
Diamonds are in Your Own backyard
That's because the grass isn't always greener. Diamonds are in your own backyard. Real estate is so localized that it can be very difficult for the normal average investor. This is different if you're a hedge fund manager and you're looking at buying 3,000 homes next week. That's a little bit different, okay? You're going to be buying so many houses at once that you will actually get some sort of semblance of the overall market because you bought so many at the same time.
For the average real estate investor watching this video, you're probably not going to buy 3,000 homes next week, so you're going to be focused more on the localized side of this business, the micro side of the business. The new reports that say that that city is doing well or that state is doing well, in most cases I really consider a lot of that noise. It's noise because it doesn't apply specifically to the property you're working on. I also see where people get concerned about, "If I buy a house in this state and I just read an article, said the values have been stationary or even dropped, how am I going to sell it?" See, my attitude is in real estate. You only need one buyer. You don't need 4,000. You need one. It's very micro or localized. It's not macroeconomics that you're dealing with.
Reasons Why Being Local is so Helpful
What that means is that you understand your area. I want to tell you a good story about this. These two hotel operators from New York, they always bought their hotel properties in New York. They got tipped off to a property that was for sale in Denver. It was a wonderful hotel, had great cash flow and the price was the incredible. The price was just beyond incredible. Up to that point, these gentlemen had never even considered buying outside of New York because they wanted to stay local so they could manage their properties, and here they were, presented with the deal of the century. How could they be so lucky, right?
They flew up to Denver and for one week they did intense due diligence on this property. They watched the staff, they watched the customers and they just concluded this was the deal. The night before they were going to fly back out, they're at the bar. A gentleman comes up to the bar and starts talking with them. Turns out this guy is a pilot. These guys had been interviewing these patrons throughout the week just to get a feel for if they liked the hotel. This gentleman said, "I love this hotel. Every time I fly in here and have a lay over, I stay here." These two gentlemen were just like, "Yes. We've got the right deal." They told him. They said, "Yeah, we're looking at buying this property and this week we've been doing our due diligence. You've just confirmed what we thought to be case and that is there's great management, there's a great team in place. It's a wonderful property, a wonderful location."
After they said location, the pilot said, "You know, funny you should mention that. I don't know anything about hotels. I'm a pilot, but what are you guys going to do when they move the airport next month, because I'm sure you know, this has been a huge ordeal, building the new airport on the other side of Denver, and obviously once the airport and all the flights go there, I won't be staying here anymore because it'll be too far away." These two gentlemen looked at each other and they realized just why there was such a good deal on the hotel.
What the point of this story?
The point of this story is that with your local familiarity you really know what's going on around your area. You know when a new highway is being put in. You know when a new plant is being built. You know when something is being torn down. You know what's going on, and so you have a huge leg up on anybody outside of your area. You know what's happening. You know the culture of your area, so you know the types of people that live there. There are so many things that you know that you probably don't even realize you're aware because it's just part of you living there.
Every time you go out to dinner, every time you take your kids your school, there are so many different things that are already inside of your brain, what I call familiarity, that a long distance investor would never be able to know. That's a big a deal, so familiarity. Another thing that's important to point out is, and I started to touch on, it was management. Management is difficult in real estate long distance. I'm sure there's going to be those that are watching video that are going to say, "Phil, I can just hire a property manager. I don't need to be there." You could read my book on my thoughts on property management, but it's very difficult to manage long distance.
I'll tell you where people run into trouble here. It has to do with turnkey properties. You may have heard of these before, where what will happen is, in a local area, an investor or a company will buy the real estate, fix it up, move a tenant in there and then sell the property to somebody halfway across the US. They will call it turnkey because they not only bought it, fixed it up and sold it to you, but they're also the property management company. These turnkey properties really cropped up quite heavily the last couple of years. I can't tell you the number of situations that I have to help our students that join our program that have had a turnkey property or two, and it's an absolute mess.
The property is in Memphis, Indianapolis, Detroit, Texas, Jacksonville. It's somewhere out there. The problem is, they're not there, and so they have to rely on the property manager to continue to fill the property and it's very difficult to manage because real estate is hands-on. Being able to be there, you can see what the problems are. You can experience issues. You know what? In a lot of cases, we always recommend our students doing rent to own offer to get a tenant buyer as opposed to just leasing out to a standard tenant. That way you get some money upfront, which could offset if the tenant moves out and trashes your place. A property management company is not going to offer that service in most cases, so property management is very difficult long distance.
Let me tell you, I moved from Nashville several years ago to Florida and I had a lot of rentals in Nashville. The question becomes, how many rentals do I have in Nashville now? Zero. Why? I have zero because it's very difficult to manage long distance. If I can't do it, and I'm a professional, I've been doing this for very long time, I'm sure it's going to be very difficult for you to do it. Owning property long distance from a management standpoint is in many cases, I'll tell you, for a lot of people, it's an absolute nightmare. If you do own a turnkey property right now, I pray for you. I hope you can work it out. Maybe the property management, maybe it all stays filled and everything works out great, and maybe over the course of five or 10 years, it goes up in value.
Being on the Ground
I hope so, but a lot of people have really struggled with it. Familiarity is helpful. Management is helpful. It's helpful to be local of the management. Another thing is just being local, you can be, I'm going to say this, on the ground. On the ground and a lot of reasons on the ground. On the ground because you can go look at the property. It's a big deal. It's one thing to see something on the computer. I do a lot of my investing from a chair, from a computer screen, but at the end of the day, I still go out and look at property. Looking at it on the ground is important.
That's just the beginning. Being able to meet the inspector, meet the appraiser at the properties to control bills if you're trying to flip them; being able to see what the problems in case you have to hire a contractor so you know if they're lying to you or not. Contractors don't have a great reputation in this world for being incredibly ethical. So being on the ground is huge. You can see what the problems are. What if you want to meet a tenant before you put them in there? That way you know if they're going to be absolutely terrible to deal with or not.
It's nice to meet your tenants in person as opposed to having to go through a property manager because ultimately, and I don't want to beat up property managers here because there are some great value to some of them, management is usually 10% of the lease amount. 10% of the gross lease is usually like 50% or more of the net profit, so they're usually making most of the money and they do not have any skin in the game. You have all the skin in the game. You're the owner. The tenant ruins the place, you got to pay for it, not the property manager. Being on the ground, you can meet the tenants. You can see what's going on with the property and you also can see what's going on around the property. You're on the ground.
When You're Local, You Can See Opportunities that Other People Don't See
That's a big one. In fact, there's a great book called The Millionaire Mind by Thomas J. Stanley, which clearly outlines the importance of being able to see opportunities that other people simply do not see. Being local, you can see things that the long distance people cannot see because you're there on the ground. That means you have to do that kaleidoscope thinking like I was talking about. You have to change your view and look at things just a little bit differently, but you may find that there are absolute diamonds in your own backyard.
For example, I don't invest long distance. Now I do teach, train and coach and mentor students and then we share in profits, but they're on the ground, okay? If it was such a good idea to invest long distance, I wouldn't teach anybody anything. I wouldn't be on this video and I'd be just doing deals all across the country with a bunch of employees, but I discovered it doesn't work that way. You got to be local. I invest locally. I invest where I can drive my vehicle within about a 30 minute drive. I try to stay close because it also helps, because all the little things that go on, it's so nice when I can just stop by the property and check on things or deal with something real quick. Being long distance, everything is a much bigger hassle, including getting access to the MLS, building the right team of contractors, having the right title companies and all these other important aspects.
Where Does Long Distance Makes Sense?
Well, there are a couple of exceptions to the rule. The first, we talked about it. If you're a hedge fund, if you're a money manager, you want to buy a bunch of real estate, if you need to buy a whole bunch and you want to make a wise decision, it does make sense to look at some of these macroeconomics statistics and find the right markets to work in. Another thing is, we used to do a lot of short sales. We don't do as many anymore, but when we were really heavy into short sales, we would do some of those long distance because with short sales, the way we were doing them, we'd negotiate the short sale and then we put it on the market, and whatever somebody paid, they would be the one to hire the home inspector. We really were just pushing a lot of paperwork and making a lot of money.
The problem is, a lot of that has changed recently, and so really, you still have to be pretty much local these days with short sales. There was a time when short sales could really be done long distance and that worked out okay. That's really the biggest exceptions. I think you invest close to home, whatever the problems you think you have locally, there's an equal benefit to being there as well. In other words, you have drawbacks and you have upsides to being where you're at right now, so the grass really is not greener. It doesn't get greener somewhere else. It's right there in your own backyard. That's where the best opportunity is, so that's where I'm going to recommend that you stay.
I still believe that you should know the property that you're getting a tax lien on, but there are certain areas of the country where you can get a higher rate of return on your tax lien. Maybe you fly in for the tax lien option or maybe it's online and you don't have to. You can look online to see where the property is. If you know it's a single family home with a big, fat first mortgage, you know it's probably going to get paid back or redeemed prior to a tax deed sale, so you know you could probably get your money back.
There are some examples where that may make sense a little bit too, but by and large, if you focus, especially if you're doing creative real estate investing, which is primarily what I teach, then close to home is going to be your best bet. Whatever you think your problems are, your diamonds are in your own backyard.