5 Reasons to Stay Close to Home in Real Estate Investing

5 Reasons to Stay Close to Home in Real Estate Investing

The best way to build your wealth is in your own backyard

It’s no secret that one of my favorite investment types is real estate. In fact, my very first investment was a little, two-bedroom house in Portland, Oregon. It was so close to my own house at the time, that I could jog there — and I did so a few times a week to keep an eye on my beloved investment and pick up on any changes happening in the neighborhood. I made $25 a month in cash flow, but it was the sweetest $25 I ever made. Finding that little house instilled in me a love for the hunt.

Today, I own thousands of apartment units that make millions of dollars every year; but honestly, the fundamentals I use to invest in those units are no different than the fundamentals I used to find and buy that little house in Portland decades ago.

The thing about real estate investing that excites me is the concept of “value investing.” What’s the true value of the property? That value includes both cash flow (passive income you earn each month from tenants) and potential capital gains (when you sell for profit down the road). A value investor — which is what Robert and I are — buys a property based on its overall value, both today and in the future.

When I’m searching for my next investment opportunity, I use a pretty simple two-step formula:

  • properties that can be bought below market, and

  • properties that have the opportunity to be improved, and through those improvements, grow in cash flow and value.

Now, for anyone new to real estate investing, there’s one super important footnote to that formula: only look for a property close to where you live. Why? Let’s dive into the benefits of staying local with your real estate investments:

  1. First-hand knowledge of the area

    One of the smartest moves a real estate investor can make is to keep her finger on the pulse of the area in which she’s investing. This will give you important insight into things like whether the rents are going up or down, if businesses or stores are moving into or out of the area, what the property values are doing, and if the overall trend in the area is increasing or decreasing.

    One of the best ways to accomplish this is by personally inspecting the area you’ve zeroed in on. Jog, walk, or drive around the neighborhoods you’re considering regularly. Note any changes, and pay particular attention to For Sale signs. How fast do they go up — and come down? Who are the most popular agents? Talk to people who live in the area and ask them about it. You might be surprised at the answers.

    These are just some of the factors that you’ll want to stay on top of, so that when a property does come up for sale, you’ll be the expert on that area. You’ll know quickly whether it’s a property and an area that are worth pursuing further and you’ll be able to act fast and get a jump on the competition. This saves you a lot of valuable time and money in the long run — as well as a lot of headaches.

    Now, some people think they can rely on brokers for this type of information, and to an extent you can — if you know and trust the broker, and you have the means to go and check out an area and property yourself. Remember, a broker’s job is to sell you a property, so you’ll need to look at everything they tell you with a critical eye. That takes experience. But until you’ve made many investments and built many relationships in the real estate community, there are plenty of properties right in your backyard. Become an expert at home before thinking of expanding into the next “hot market.”

  2. Streamlined search

    If you think that there are always better deals in other cities, you’ll spend all of your time chasing down hundreds of potential properties all over the country or world. This is exhausting, because you’re all over the map, literally. And in the meantime, you’ll miss out on the deals sitting right under your nose, just a few miles away.

    Are there good deals elsewhere? Certainly! But by focusing on a few key areas close to home and becoming the local expert at little-to-no-cost, you’ll be amazed at the number of good deals that are right past your doorstep. And by staying focused on one smaller area, you’ll be the first to know about opportunities.

  3. Savvier problem solving

    This is also important because you may purposely buy a property that has a known problem— and that’s not necessarily a bad thing. In fact, it may be precisely why the investment ends up being a great deal. One of the best things to look for is a property that someone else has walked away from because of a problem. If you can figure out how to fix that problem, you can instantly increase the value of that property.

    One of my favorite examples is when Robert and I came across an apartment building in Phoenix, Arizona, with a 37% vacancy rate — a pretty high number. Nobody else would touch it. But we asked ourselves the following question: “How can we solve this problem?”

    It turned out the property was being run as a hotel: People could rent a fully furnished apartment for anywhere from a week to a year. One not-so-small problem: no one wants to be in Phoenix in the summer, so most of the units sat vacant during those months. To make a long story short, we did our research and converted the property from short-term hotel rentals to regular long-term rental apartments. The vacancy rate went from 37% to 3% — and the property’s value soared. We were winning on both cash flow and capital gains!

  4. Easier access to maintenance

    If a problem arises on your property (and it will, trust me!), you don’t want to have to catch a plane, rent a car, go to the property, find a plumber or electrician, rent a hotel room, wait for the problem to be fixed, drive back to the airport, and catch a plane home. It’s a pain in the rear end, and it costs a lot of time and money.

    As your investments get more sophisticated, and the properties get larger, you can hire a property manager to do some of this work for you — but trips still factor in. And until you reach a certain level of investment, it’s very difficult to find a dedicated and useful property manager. In truth, managing repairs from afar is more trouble than it’s worth.

  5. Better communication

    Whether you’re in the process of buying a rental property or you already own one, there are a lot of people to stay in contact with: a lender, property manager (if that applies), tenants, maintenance crews (landscaping, pool, handymen, etc.), etc. It’s much easier to stay in direct communication when you’re only a few miles away — you have the opportunity to develop relationships because you can pop by the property to have an in-person chat. Nobody can dodge your calls or pull the wool over your eyes, because it’s easy to see for yourself what’s really going on.

Before you plunge into that first deal, it’s wise to arm yourself with a little more information. Start with this free guide, “How to Buy Your First Investment Property.” Then, sign up for one of the Rich Dad investing classes (hint: How to Create Real Estate Cash Flow is a free training). The more you know, the easier you’ll be able to identify a good deal when one arises.

Original publish date: December 04, 2014