Should I Buy Investment Property Locally?

Today we are hosting our first guest post, ever, from Brandon Turner at BiggerPockets.com.  Brandon reached out and graciously offered to answer a question I'd recently asked about rental property.  His article addresses how, and where, you should look for a rental home.

I’m not a hippie.

However, living in Western Washington, I’m surrounded by them daily and tend to pick up on some of their habits (it’s contagious, apparently.) One such habit is the importance of buying locally grown food – from farmer’s markets, farm stands, and selectively shopping at the supermarket. I understand that it is good for both the environment and my local economy to buy local.

But what about rental property? Does that need to be local, also?

You see, I love investing in real estate. It’s kind of an addiction that I started at 21, and haven’t been able to cure. I firmly believe - if done correctly - buying investment property can be one of the safest and most secure ways to build substantial wealth. However, it’s simply not feasible in a lot of local areas to invest in real estate. For example, trying to buy rental property in New York City is probably beyond the reach of most individuals.

So when is a good time to buy locally, and when is it wise to invest out of the area? This post is going to share my thoughts on this question – since a question within a previous blog post here at DoneByForty inspired me to write it. Let’s get going…

What Makes a Good Deal?

Ask 100 real estate investors what makes a good deal – and you’ll likely get 100 different answers. However, I believe there are several key metrics you should focus on when buying rental property:

1.) Cash Flow – Cash flow is the amount of money left in your pocket after all the bills have been paid. Keep in mind, this also includes taking into account that the property may be vacant X% of the year, and you may spend another X% in maintenance each year. I believe positive monthly cash flow after taking into account ALL the expenses in not optional.

2.) Return on Investment - Once you have your cash flow, it’s easy to determine what your return on investment is. For example, if you spent $50,000 on a small rental house and produce $5000 per year in cash flow – you are sitting on a (cash-on-cash) return on investment of 10%. If you are only getting 2% return on investment … you are probably better off with a savings account.

3.) Location/Investment Type – Additionally, you don’t want to be forced to invest in an area or property where you don’t feel comfortable. Many landlords thrive with low income housing – but maybe you don’t? Others would never think of owning multifamily properties, where others welcome it (I’m one who loves multifamily.) If you don’t understand or are not comfortable with a particular property type or location – don’t invest until you feel comfortable with it.

The 1% Rule

There is a popular metric used by investors known as the “1% rule” which states that a property’s monthly rent should exceed 1% of the purchase price. So, if a property costs $100,000 to purchase – you should be able to rent it for at least $1,000 per month. Many investors actually aim higher, for perhaps a 1.5% rule or 2% rule (some even achieve 3%, though this is very uncommon.) Keep in mind that these rules are only “rules of thumb” to help an investor very quickly analyze an investment property to decide if they should pursue it further. However, the higher the percentage – the higher the likely cash flow.

Personally, I would never buy anything below 1%, but shoot for the 2% mark whenever possible, because I want significant cash flow. However, 1.5% and 2% deals are possible in my location and they are not possible everywhere. (I have to search high and low for them… they don’t come easy.) This is why I would rather focus on the 3 metrics above (Cash flow, ROI, and location/property type)

What Is YOUR Area Like?

So to answer the question “should I invest locally” – you really need to take an honest evaluation of your local area. What kind of deals are out there? What neighborhoods do I know well? How far are you willing to drive? What kind of returns are you looking for?

Learning about your local area is easier today than it’s ever been. You can do most of your research online, discovering property values and rental amounts through websites like Zillow or Craigslist. You can even take a virtual drive by most neighborhoods through Google Street View. Or, you can do it the old fashioned way and just get out there and drive around.

Once you know what your local area is like, it will be much easier to decide if you should invest locally or long distance. If you can’t find deals in your local area that can produce better returns than a savings account – why go through the hassle?

Furthermore, if you don’t have the personality or time to manage rentals and don’t want to learn how to be a landlord and want to hire a property manager to look after everything – then you have even less reason to buy locally.

Conclusion

So, as they say – “different strokes for different folks.” Only you can decide if investing locally is the right choice, based on the returns you want and the position in life you have. I believe if you can find great deals locally – it makes perfect sense to be able to drive by your rental properties and keep an eye on things. Being able to manage and do repairs yourself can definitely save you money and increase your cash flow.

However, if those returns are not possible in your location – don’t be afraid of buying long distance. There are numerous “turn key” companies that exist that will help you find deals, buy property, screen tenants, and manage your investments from a distance.

Do your research either way, and do what makes sense.

What do you think? Leave me a comment below and let’s chat about it!

Brandon Turner is an active real estate investor and the Senior Editor at BiggerPockets.com, the real estate investing social network. For more on getting started investing in real estate, be sure to check out the free online guide, “The Ultimate Beginner’s Guide to Real Estate Investing.”