Investing Locally Versus Nationally ~ By Chris Anderson, Ph.D.October 22 , 2006
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You're driving down the street in your hometown and all of a sudden, you see a goldmine sitting in front of you... It is a vacant house, with overgrown weeds in the yard, needs some TLC, and is just begging for you to buy it cheap. The wheels start spinning in your head about the 10, 20, or 50 thousand dollars you can make by rapidly acquiring this home, doing a quick fix up, and then selling as a pretty house.
Now you rapidly scramble to the courthouse to look up who owns this property.. SCORE!!! It is an out of town owner. Clearly they are going to be desperate to sell. You track down the seller's phone number and with much anticipation, you make that all important call... You can hear the cash register ringing now. But wait, you are getting the dreaded message from the phone company..
"We're sorry, but the number you have reached has been disconnected. If you believe you have reached this in error..."
Bummer. Well, clearly all we have to do is send this person a letter and it is pay day baby! So, you polish up your writing skills, and send out the letter just knowing that your phone will ring as soon as it is received. After day 5 of waiting, you decide they must just be out of town and any day, you will get that call. After week 2, you are starting to wonder what is going on but still are hopeful. Finally, after week 4, you are starting to believe this is a lost cause.
Oh well, another golden opportunity that just didn't quite materialize.
There Has Got To Be An Easier Way
The above scenario, while hypothetical, is a typical scenario faced by many investors that work on a local basis. Regardless if you are interested in wholesaling, flipping, renovating, lease optioning, or the variety of other options available to you, there is two things that you must accomplish to be a successful local investor:
· Have a steady supply of quality opportunities; and
· Have a steady supply of buyers for your properties
As an investor that has participated in the purchase of millions of dollars of properties locally as well as on a national basis, let me be the first to tell you that BOTH local and national investing work great IF DONE PROPERLY. However, the impact that each has on your time involvement is wildly different.
Historically, almost all real estate investing has been done on a local basis. People get to know their own backyard, they find deals, and they invest. More recently, with the explosion of the internet, there has been a move for investors to participate on a national, if not international, basis. In the later case, brokers or investment groups identify potential properties and make them available to investors via email, web events, or live seminars.
In this article, I will try to explain the pro's and con's of investing locally vs nationally. Even though I lead a group of national investors numbering of 20,000, I still invest in my backyard and find it profitable. In my opinion, an investor's should not decide BETWEEN investing locally/nationally but rather understand the merits of both and use which ever suits them best at a particular time.
Local Investing: Pro's & Con's
The mantra in real estate investing has always been "invest in what you know - your own backyard". For the knowledgeable investor, this is good advice because then you KNOW when a good deal is actually in front of you. However, when we discuss the national investing approach, you will see that it is not the only way to know the market.
For example, suppose you get offered to purchase a home at a fire sale price of $130/Sq. Ft. According to the broker, this is a slam dunk. If you happen to KNOW that properties are going for $170/Sq. Ft in the area and the fix up costs are reasonable, then in a matter of minutes, you can make a decision to purchase the property (or any other form of "acquisition" that you use). That local knowledge is critical to understand when you have a good, low risk opportunity.
In addition to just local knowledge, there is a number of other issues that we must consider. Specifically, some of the pro's & con's of local investing that we see are:
Most local investors take one of two paths after gaining some experience. Either they abandon it because it takes too much time on a part time basis or they find it lucrative enough to turn it into a full time business. For the individual that has money and credit to invest but not much time, then most find the local approach to be frustrating.
National Investing: Pro's & Con's
The best way to understand national investing is to look at Walmart's business model. What they do is find suppliers that can produce quality product at the most competitive price. Because they have such a large consumer base, it is lucrative for the supplier to provide quality product at much reduced margins relative to low volume stores. Also, by not being restricted geographically, they can find those suppliers where the economics makes sense for everybody.
In the national real estate arena, it really works the same way. Consider our group that has over 20,000+ investors registered to our database. If you are a real estate developer interested in rapidly selling a portion of your project, then you would be very interested in talking with us because of our volume of buyers. Of course, you know that you are not going to get top dollar for your sales because our investors are not going to buy unless it is a good deal; this is how it becomes a win-win for both the developer (supplier) and the investor (consumer).
One other factor comes into play. In many locations, including my local area, many types of real estate investments do not make sense because fundamentals like price, rents, and consumer demand are out of whack. For a national investor, it is absolutely irrelevant because there is always markets doing well. When a specific market, like maybe Florida or California gets out of line, it is simple to just look for investments elsewhere.
Of course, national investing has its pitfalls as well. To summarize, the pro's and con's of national investing are:
1. Buying Power - By being an individual investor within a large group, then you have the buying power of Walmart behind you even though you may only plan on buying 1 property.
2. Time - The national groups do all the work for you at no cost. They are paid fees by the developers and because of volume, it allows them to perform considerable efforts to find quality properties. You simply evaluate all the information that they have gathered.
3. Considerable Analysis - Quality national groups will go to great lengths to understand and convey the local market information to you. They understand that you may not visit the area so they want you to be as informed as possible.
4. Little Competition - Even though there is a HUGE number of investors in these groups, most everybody finds that there is plenty of opportunity to go around. Reason being is that most people want to only buy 1 property and quite frankly, most people do not act quickly enough.
5. Diversification - You can buy properties in different areas of the country so if there is a down turn in one area, it may not impact your other properties.
1. Personal Knowledge Of Market - You will not originally understand the market. However, the analysis delivered to your email will bring you up to speed quickly. Most national investors feel comfortable buying without visiting but that is a personal choice (airline tickets are cheap);
2. Access To Property - Because time scales are typically short, if you want to visit a property, you need flexibility to juggle schedules.
3. Rental Issues - You typically don't want to manage a property from long distance. Because of this, national groups will identify appropriate property managers in the area.
4. Typically Requires Good Credit - The national groups can obtain good financing options for you but most are going to want beacon scores of 650 or higher.
5. Trust - Requires a lot of confidence in the national group. Do your due diligence on the group.