1. Forces you to treat the property as a business
In real estate valuation, there’s a term called “highest and best use” which refers to a property/building’s most optimal use given its characteristics and location. As an investor, we apply that same concept to your time. An investor’s time should be focused on what they do best–finding and acquiring profitable deals and raising capital. That is after all the most optimal use of your time. Unfortunately, many beginning and even seasoned investors get caught up trying to do everything themselves. This becomes overwhelming as they scale and soon lose interest, become frustrated, and suffer lackluster performance in their properties as a result. Trust us; we’ve been there. When you’re investing out of state though, you’re in many ways forced to treat the property as an investor should: simply a stream of income. That means, even if you wanted to, you couldn’t physically waste your time on these low $ value/hour tasks like painting, fixing toilets, searching for tenants, etc. Instead, investing out of state forces you to enlist a team of local professionals who each specialize in their particular part of the business. This improves your investing doubly as you (1) now have the time to focus on your core competency and (2) your team can execute on their “highest and best use” for your properties. WIN-WIN.
2. Highly unlikely that the top markets are always in your backyard
You wouldn’t limit your stock-investing to just companies in your home state or metro area, would you? If you were to make this suggestion to your financial advisor, you might get laughed right out of his office. Just as in stock-market investing, with real estate your capital should flow into investments with the best risk-adjusted returns regardless of geography. The fact is that there is no SINGLE real estate market, despite what financial pundits or economists might report about in the Wall Street Journal. There are in reality MANY, fragmented real estate markets. Each one with its own particular strengths, supply/demand dynamics, and idiosyncratic risks. It follows that a given market may be going through one stage of growth at the very same time that another is languishing. For example, San Antonio prices and rents may be climbing as that city expands and attracts jobs and people. Meanwhile, nearby Houston may be contracting at the very same time due to its exposure to a hard-hit oil industry. Thus, you want your capital to be nimble and not tied to just your particular backyard where you may or may not be getting the highest risk-adjusted returns. As markets shift, you want to have the ability to reallocate that capital to where growth is going. We can already sense the push-back from some readers. “But I want to be able to see the asset.” “How am I in control if I can’t even drive to my property?” “What if something goes wrong?” All of these worries would be warranted if it weren’t for the colossal technological advances of the past decade or so. It’s never been easier and more efficient to attract deals, perform due diligence, acquire assets, and manage teams remotely than today. For anyone interested in how this is possible, we urge you to check out “Long Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties” by Biggerpockets’s own David Greene available here.
3. Many of us live in states with unfavorable tax regimes and non-business-friendly laws
At its core, investing is about allocating capital efficiently. That means deploying capital where it is appreciated–where it’s treated best. If for example a locality or a state enacts laws that make it very difficult and very costly to evict problematic tenants, that area becomes less attractive to landlords and investors alike. It is higher risk from an investment standpoint, thus valuations will be lower (all else equal) to another area that doesn’t embrace these non-landlord-friendly laws. Put simply, where investor capital isn’t appreciated, it looks for other opportunities where it will be. Thus, state and local government play a huge part in driving growth and investment within their areas through their public policy: enacting sensible and simple land-use laws, maintaining property taxes at reasonable levels, keeping crime low, providing tax breaks to employers, and developing efficient housing regulations. They must also undertake policies to provide a business-friendly environment that attracts great companies which in turn create a strong local labor market. This is not just theory, it’s borne out empirically as well. As an investor observes demographic trends across the country, he/she will notice a large migration away from high-tax, burdensome regulation, high cost-of-living states toward low-tax, business-friendly, and affordable states. A savvy investor understands these dynamics in their target market(s) and how they impact jobs, population growth, and other key demographic indicators. Likewise, Maple Capital Partners prides itself on following these trends and educating others so they too can take advantage of them. We believe the 3 most important words in real estate aren’t “location, location, location” but “demographics, demographics, demographics”.
4.Cost of entry to some expensive markets can keep local investors from achieving scale
What lead Gonzalo and Marc to first start looking to invest out of state was actually something surprisingly simple: a high cost/unit in their local market. It had been their goal from the start to grow their portfolio to a size where they could afford to hire a professional management staff to oversee the day-to-day operations. They were tired of managing the properties themselves and dealing with leaky faucets, storm damage, and tenant issues. They dreamed of what tech entrepreneurs refer to as “achieving scale.” To get to that point though, they’d have to acquire many more units in a short period of time. At that time, they had found that housing in their local area was priced at $150-250k/unit, but by simply driving 1.5 hours away, they could acquire properties at $75-100k/unit. They could effectively shrink their timeline of achieving scale in their portfolio in half! So if they had originally needed 5 years to pick up 100 units and hire on-site management, they could now reach that same goal in 2.5 years! When we think about real estate investing and all of its numerous benefits, I highly doubt becoming a professional landlord is on any investor’s list. Let’s face it: there’s a very low likelihood that anyone gets into this business because they love fixing toilets. Most people love real estate for other reasons: it’s a stable source of regular, consistent income, it has great tax benefits, and it tends to appreciate over time. So if investing out of state means a shorter time-frame to outsource the parts of the business that none of us enjoy and instead bask in the parts we all love, then certainly you’d be foolish not to.