Today’s question is from Daniel. A great question here and one that we hear often, my team of investment counselors hear this very often. And over the years, I’ve heard this asked so many times and I talk about it when I’m interviewed on other people’s podcasts in different media spots. And the basis of his question is how important is it to invest locally? Great question. And he says, hi Marco. I am a new real estate investor and have some concerns stopping me from investing in my first property.
Well, let’s help you out with this.
One of my concerns is that I may be moving across the country for a career opportunity soon. Do you think it is important for investors to be in close proximity with their investments so that it is easier to manage tenants, manage renovations, and dealing with potential issues? How have you managed your long-distance investments?
Thank you, Daniel.
All right, Daniel. Thank you for the question. So let me ask you a question. Let’s just assume you were investing in stocks and you wanted to pick the very best possible stock on the stock exchange and you determined it was Coca-Cola and you are living in, let’s say Southern California, would you need to move to Atlanta or live in Atlanta in order to invest in Coke shares because that’s where their headquarters is in Atlanta, Georgia. Well, if you think about a first split second, you would say, well, no, of course not. That’s ridiculous. Why should I live or have to live in Atlanta or move to Atlanta to invest in Coca Cola, if that’s where I think the best investment opportunity is at the moment.
Well, that’s the same with real estate. It doesn’t matter where you live. You have the ability to invest in real estate anywhere and can do it and should do it for the reasons I’m going to talk about here. You see the United States is a very large country and it’s made up of hundreds of local real estate markets. Each of those markets move independently of one another, due to many local factors and things that drive that market, whether it be up or down. And because of that, you need to recognize there are going to be times where it makes sense to invest in a particular market. Of course, that also means there are times when it does not. So you should only be investing in markets when it actually makes sense to do so. And I’m talking about financial sense and economic sense, and not because you live there or you bought property there before, or you have family there. I’ve heard that before. Well, I should invest in a certain market cause I have family. And if I ever need to call on someone to drive by my property, I’ve got my brother in law to do that.
I mean, think about that logically for a minute. They’re probably not even trained in property management and real estate investing, but yet you’re going to rely on somebody to literally just drive by and take some pictures for you. That doesn’t make sense. So according to census.org, which is the US Census Bureau as of March 2020, this year, there are 384 metropolitan statistical areas in the country. And if you break that down a little bit more granularly, there’s 543. What they call micropolitan statistical areas in the United States. Those are a lot of areas that you can pick and choose from. Now, don’t get lost in this. Let’s define this real quick. Each metropolitan statistical area is an area that has at least one urbanized area of 50,000 people or more inhabiting that area. And a micropolitan statistical area has to have at least one urban cluster of at least 10,000 people, but less than 50,000 people in population. So these are obviously bedroom communities out far suburbs and reasonable sized towns tend to 50,000 people. But that just goes to show you that there are so many local markets around the country and I emphasize the word local.
Why would you even want to think about investing locally? Well, here’s the reason to invest locally. There’s only really two conditions that I can think of. One is if you are actually undertaking renovation projects where you’re out finding these deals, distressed properties or properties that you’re picking up from distressed sellers and you are hands-on, are you the one renovating these properties? Or are you managing a crew that is renovating these properties and you have your hands in it one or both. So if you ask the question, do I need to be hands-on? And the answer is, yes, you have to be hands-on. Then there’s an argument to invest locally. If you don’t need to be hands-on, or you can be hands-on remotely through frontline, general contractors or managers or property managers that are essentially doing all the work for you and you’re providing direction and making the important decisions, then you don’t need to invest locally.
And then the other reason would be is if you are a property manager or you are managing your properties and you know what you’re doing, and you know how to market and sell and work with tenants properly screen and qualify them. You understand tenant-landlord laws, you’ve got people’s skills. Then it makes sense to self manage whether locally or long distance, or there are people who actually self manage their own properties, their own portfolio. And they have properties all over the country and they do it from hundreds or thousands of miles away. So those reasons to potentially invest locally, usually it’s because you are on, or you are working your own local market and the market where you live happens to make sense for you and from an investing perspective. But unfortunately for many people, that’s not the case, especially if you live in one of the many coastal markets around the country or Washington DC, or possibly Denver, Colorado, there are many markets that are top-heavy or expensive and or unaffordable where it is difficult to find a deal if you can. And if you do find a good deal in the context of that local market, often the numbers don’t make sense. Your cap rates are very low, so numerically or financially speaking, it doesn’t actually make sense.
So what you really should do is stay focused on where should you invest to generate the best returns for your invested dollar. If you’ve got a limited amount of investment capital and you need to put it to work and you want it to work as hard as possible for you, then you need to be disconnected from your local market. You need to be what I call market agnostic. And that means that you are not married to anyone particular market. You look at the markets based on their own fundamentals and merits and logical arguments to invest in those markets because of its stability, potential rate of return. That’s potential cashflow availability to inventory, of course, the team of people that you need there.
So I say, focus, on the best returns, that means focus on markets where you can generate positive cash flow. There is an available inventory. You can build an available team or just inherit an available team of qualified, vetted people, which is essentially what we do here when you’re working with us and our investment counselors, we’re passing along all those people and those resources that we use to you and there’s no cost in doing that. And then look at the stability of the market. The two key primary things you want to look at is number one, population growth, and number two are jobs and job growth. And it’s not that one comes before the other because these two things ebb and flow, but they’re really connected at the hip because if there are job opportunities in a particular market that will help drive the population because people move in because of those jobs.
But if you have, I have a poor job prospect in a market, there are job losses and it’s been going on. It’s a longterm trend and the population is declining. That’s not good for that market. Detroit was like that for a very long time. And that’s why there are so many vacant houses. There is because people moved to go elsewhere. So the stability of a market is critically important. The cashflow ability of that market is important. Available availability of inventory is important. And of course last but not least is the appreciation potential, which really comes out of the jobs and population growth, organic and out, or in-migration from other places like other States. So that was just another variable in that formula. But those are the things to focus on. Where are you going to get the best returns and the best experience for your invested dollar?
And that often for many people does not mean it’s in your local market or your backyard, because if you’re listening to this and you live in, let’s say downtown San Francisco or Beverly Hills California, or maybe the heart of Miami, you’re probably not going to find a lot of deals. And even if you do find a good deal in the context of that market, the numbers won’t make sense. And what I mean by that is, let’s say you live in San Francisco and you find a condo at a steal of $800,000 when really it should be selling for 110 or 1.1 million, but you can only rent it for, let’s say $4,000 a month. Then those numbers are not going to make sense. They’re big numbers but do the math. And you will see that your rates of return are not that high. Your cap rate is pretty low and the rent to price ratio or rent to value ratio in that market is probably around 0.4%, maybe 0.5%. And that’s about roughly half of what we would like to see ideally in a market where you can get roughly 1% plus or minus. I mean, you can go down to 0.8% and the numbers will still work, especially in a market that’s showing strong appreciation that will still work well for you in the end.
So that’s really my long answer to your short question of how important is it to invest locally in your real estate market, in your backyard. And I say it’s important to focus on the best markets that are going to generate the greatest returns and stability for you and your invested dollar.
Alright, Daniel, appreciate the question. It’s a great one. Thank you for that. And if you’re listening to this and you haven’t subscribed, remember to subscribe and by the way, help us share the show with other likeminded people who can benefit from it as well, greatly appreciate any kind of rating and review you can give us, especially on iTunes. So if you do that, thank you in advance and yes, I do read them all. So thank you for that. And that’s it for today.
Thank you for listening. I will see you on our next episode.
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