Beginning your foray into real estate investing is an exciting time!
The wide-open road lies before you. There are fifty states and so many places that you can invest –from California to the New York Island! Income properties can be a great way to grow your wealth and ideal for creating additional sources of income.
However, the downside is that actually getting started can also be overwhelming. Decisions abound, and trying to decide where to invest, which strategy to employ, what property to purchase, what neighborhood to start in, all compound; making it difficult to take that first step.
When you first dive in, it often seems that the best properties, best options, and best deals are the ones far away from home. But is this always the best option?
While there may indeed be bargains to be had in markets across the country, it’s important to ensure that you don’t fall into the trap of thinking the grass is greener. In some cases, it might make sense to consider investing in your own hometown. In fact, there are a number of unique benefits that come from investing in your own backyard, especially if you are just getting started.
Here are just a few reasons you’ll want to consider thinking local when it comes to investing –run through this list before you broaden your search!
Benefits of Investing Locally
You’ll Have Insider Knowledge
Investing in your own backyard or neighborhood offers one especially distinct advantage. You’ll have insider information on the area that most people won’t have. You’ll know the best neighborhoods and will be familiar with areas that would be attractive to potential renters. You will know popular schools, general public transportation routes, and local amenities and shopping centers. While you’ll want to drive by and see the property, you won’t have to spend a lot of extra time touring the neighborhood. You’ll already know what you are working with.
And when it comes to assembling your team, you won’t have to start the ground up. Instead, you’ll be able to easily get recommendations from friends and family on inspectors, contractors, Realtors, or other professionals you’ll need to hire.
It’s Much More Convenient
Another major plus is the added convenience of being able to drive by your property any time you’d like. This allows you to assess potential properties that come on the market more easily than if you were investing in rentals that are out of state –and means you won’t have to risk buying a property sight unseen.
Buying a Fixer-Upper Is More Feasible
If you’re going to buy a fixer-upper, staying local might be a good idea. This allows you to oversee the repairs and upgrades process yourself, saving you a tremendous amount of money. Of course, going out of state is always an option too, but you’ll want to make sure you factor the cost of repairs into your projections. Having someone else to do the work can add up quickly, whereas doing some of the tasks yourself can help you to save.
Property Management Is Easier
While you could always employ a property manager to oversee your out-of-town rentals, it’s still nice to be able to drive by your property at a moment’s notice –especially after a big storm or particularly bad weather; when taking a quick drive by your property can give you peace of mind. You’ll also be able to perform tenant screening, and keep an eye on things yourself.
Assessing Potential Investment Properties
Whether you’re thinking of buying local or going out-of-state, you’ll want to carefully assess potential investment properties to ensure you find one that meets your criteria. With this in mind, here are a few important key factors you’ll want to consider.
Market Conditions
Whether you’re buying local or out of state, you’ll want to evaluate the local market conditions. Affordability is just one factor to consider, and it’s certainly shouldn’t be the only factor. The market could be oversaturated and rental rates low. Or there could be affordable housing, and low demand for rental housing. Or, maybe the market just isn’t growing economically. There are a lot of factors you’ll want to consider when assessing demand and weighing up the viability of a potential rental.
Tip: One way to get access to the data you need is by using the Renters Warehouse Research Center. See demographic trends, employment trends, housing prices, and more.
Taxes and Regulations
Another important issue that’s often overlooked when investing is taxes. Taxes vary from state to state, and you’ll want to make sure they won’t eat into your profit too much. You’ll also want to consider local laws and regulations –including measures like rent control, as these vary considerably and can have a significant impact on your profitability as well.
The Property’s Profitability
It’s also important to ensure that the property is worth investing in. Is the rent that is needed to help you turn a profit feasible in the location you are considering? Regardless of if the property is next door or three states away, running the numbers is always an important part of successful investing.
Crucial calculations you’ll want to run include:
- Cash Flow
To calculate cash flow, subtract your monthly expenses from your monthly income. Positive cash flow is a good sign. If not, then in most cases you’ll want to walk away.
Monthly Rent – Monthly Expenses = Cash Flow
- Cap Rate
The cap rate is your return if you paid for the property outright in cash.
To discover the cap rate, divide your net income by the property’s cost.
Annual income / purchase price = Cap Rate
- Cash-on-Cash Returns
Cash-on-cash returns are the return that you’ll get on the money you’ve invested in the property.
Here’s the equation:
Annual Income / Money Invested = Cash-on-Cash Return
The Neighborhood
Finally, once you’ve set your sights on a specific property, you’ll want to carefully assess the neighborhood. This is true whether it’s local, or out-of-town. If it’s local, you might think you know the neighborhood fairly well, but is there a demand for rentals in the area? Will you attract good tenants? Is it in a convenient location? Close to popular amenities? While you may be a bit biased if it’s in your local area, you’ll still need to go into investing with an open mind. If it’s out of town, it’s always a good idea to visit the property in-person to see the neighborhood and property itself, before you sign on the dotted line.
While there are pros and cons to investing, both locally and out-of-state, it largely comes down to which option you’re most comfortable with –and which one will give you the best return on your investment. While it may be more convenient to invest near to home, stay open to the fact that there may be better opportunities farther out. Of course, if you’re planning to save money by buying a fixer-upper, going local could be your best bet.
No matter which option you choose, make sure you conduct your due diligence –research the market, visit the property in person, run the numbers, and make sure you have a plan in place for management. Then hit that wide-open road! Once you get the ball rolling, it’ll be a lot easier to scale your portfolio and start working toward your goals of financial freedom.
If you’re thinking of getting started with SFR investing, but not quite ready to take that first step, check out: First Time Property Investors: How to Begin, and Real Estate Investing 101: Set Yourself Up for Success.
And if you already have a property in mind, head over to our Research Center to uncover localized market data for areas across the country –including appreciation, unemployment rates, population trends, and more! See information you need to make informed investing decisions.
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