The Ridgeview Report
The Pros And Cons Of Investing Outside Your Local Market
In last week’s newsletter, I reviewed how the physical building structure, financial upside, and mitigating risk can make or break a real estate investment. In this week's article, I'll discuss the advantages and disadvantages of investing outside your local market.
Pros
Market Dynamics: Real estate markets can vary significantly from one another. Factors such as supply and demand, economic conditions, population growth, and local regulations can greatly impact property values and rental income. Investing outside your local market allows you to pinpoint a market with the best possible combination of these factors. Regarding the effect of local regulations, see this week's article regarding San Francisco's COVID-era eviction ban that is still in effect 3 years later.
Investment Opportunities: Understanding multiple real estate markets means more deal flow. If you live in a market that has a limited number of properties selling each year, your portfolio growth is capped to some extent. If you deeply understand multiple markets, you can underwrite, offer on, and win more deals.
Diversification and Risk: Investing in other markets allows you to diversify your real estate portfolio beyond your local area. It can mitigate risks associated with local market fluctuations and economic downturns. By spreading investments across different markets, you reduce exposure to localized risks such as changes in industry, employment, or local regulations.
Cons
Knowledge and Expertise: Investing locally allows you to leverage your existing knowledge and familiarity with the area. By investing in your backyard, you may already have an understanding of the neighborhoods, rental rates, property management resources, and potential risks. Investing in other markets requires you to acquire new knowledge about the target market, including local laws, regulations, and property management practices.
Network: Investing in real estate requires a strong local network of professionals such as real estate brokers, property managers, general contractors, and real estate operators like myself. When entering a new market, it takes time and energy to create that network all over again.
Accessibility and Management: Investing locally offers the advantage of proximity. You can easily visit and inspect properties, handle tenant issues, and oversee renovations or maintenance tasks. This hands-on approach may not be feasible when investing in other markets, especially if they are far away or in a different country. Managing properties remotely requires establishing reliable local contacts, utilizing technology for property monitoring, and working closely with professional property management.
Ultimately, the decision between investing locally or in other markets depends on factors such as your investment goals, risk tolerance, familiarity with the market, and personal preferences. Some investors may prefer the stability and familiarity of local investments, while others seek the rewards and diversification benefits of investing in different markets.
Market News
Real estate operators in San Francisco, Berkley, and Oakland are feeling the pain as their local governments continue to extend COVID-era eviction bans.
A recent article by Fox Business (May 8, 2023) shares how some jurisdictions in California have maintained eviction bans for three years since the start of the pandemic, leaving landlords and property owners frustrated. The bans were initially put in place to protect tenants who were financially impacted by the pandemic and unable to pay rent. However, as the economy recovers and COVID-19 restrictions ease, some argue that the bans have outlasted their purpose and are now causing difficulties for property owners. Landlords claim that the prolonged eviction bans have resulted in financial losses and hindered their ability to regain control over their properties. They argue that while some tenants may genuinely need assistance, others are taking advantage of the situation and exploiting the ban to avoid paying rent.
Source: Fox Business. (2023, May 8). Eviction Bans remain in California more than 3 years into the pandemic. https://www.foxbusiness.com/real-estate/eviction-bans-remain-california-3-years-into-pandemic
Tips and Tricks
Terms:
Diversification- Diversification in real estate refers to spreading your investments across different types of properties, locations, and real estate sectors. Diversification provides risk mitigation, income stability, capital appreciation potential, portfolio flexibility, and resilience during economic cycles.
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