There is a constant debate: Should you invest somewhere close to you (your backyard), or should you invest in anywhere, everywhere so long as there is a good deal (deal chaser)?
There are real estate “gurus” that promote deal chasing. They say you can invest anywhere in America. They get some state-of-the-art technology that helps you to analyze deals etc. By being able to invest in the entire America, you will have no shortage of deals. For example, you live in New York .If the “deal-analyzer” (that you purchased from them) tells you there is a “good-priced” house in Georgia or Nevada or Arizona, you should jump into it. Smelling where this is leading to?
Look, this debate would have never existed 30 years ago. You were pretty much confined to where you could easily commute to. You wouldn’t have known such a deal exists, and the seller wouldn’t have known an investor like you might be interested. Investing in your backyard was a necessity.
Undoubtedly, with online real estate listings nowadays and free websites that can help you to estimate house prices (such as Zillow, Trulia). It becomes much more convenient to screen deals remotely.
Still can’t decide how wide you should cast your net?
I will put this debate to rest: You should invest in your own backyard, ESPECIALLY when you are just getting started.
The area that you should invest in should be an area that:
1) is closest to where you currently live, AND
2) fits your investment criteria.
We call this your “Farm Area”.
I will show you the benefits of investing within your own backyard. For anyone who feels investing in your backyard is absolutely not an option, I have come up with several workarounds that can help you to overcome this.
Before that, let’s clarify some keywords. Let me explain what a “Farm Area” is.
Farm Area Explained
A “Farm Area” is a region where your potential investment properties are located. It can be as small as only a few blocks or as large as several neighboring towns. My rule of thumb is an area where you can easily go to with a short notice. Again, it needs to a) fit your investment criteria and b) be close enough.
I highly recommend you spending some time thinking where your farm area would look like. This would keep you laser-focused in your screening effort. In this information-driven society, you are constantly bombarded with too many data / potential deals. You would want to drop the number of potential candidates to a point where you can do your proper analysis and still be manageable.
I will use myself as an example.
Buy-and-Hold Cashflow properties. That means Houses where rent covers all expenses including mortgage, with some money left in my pocket.
I live on South West side of Jersey City, a city that has a population of 250,000 people (2012 census). It is roughly 21 Square Miles. From one corner of Jersey City to the furthest corner is roughly 6 miles (10km). It is safe to say anywhere in Jersey City from my place is within 20 minute driving or 1 hour on my leisure bike.
There are specific parts of Jersey City that I exclude, and they are the extremes. (Jersey City is a city with very diverse neighborhoods). I exclude the waterfront and downtown area, and even parts of an area called Journal Square. They are too expensive (so no cashflow properties). On the other end of the spectrum, I stay away in the middle section of Jersey City, in particular between Martin Luther King Drive and Ocean Ave. I do not feel comfortable going there, especially at night.
I do break my rules from time to time. For example, there are some blocks that I feel are better than some others in the inner Jersey City, so I will look into those. But for the most part, this holds true. The key is to build a map for yourself to see which areas you target in.
Why do you want to invest in your own backyard?
Local expert wins.
I always ask myself: Why do I make money? What type of competitive edge do I have over others? I later realize being a local expert in your area is critical to your success.
There is an old saying in real estate: You make money when you buy.
Let’s drill into this. In order to make money when you buy, you will need to:
1) Buy at the right price. Usually this means buying at below market value.
2) Have access to good price deals and an opportunity to buy.
Buy at the right price
A smart way of investing is to buy undervalued assets. The legendary stock investor, Warren Buffett, practices in this philosophy his whole life and becomes one of the wealthiest people in the world.
Instead of buying a house at high price and HOPE that it will go even higher, wouldn’t it be better and smarter if you KNOW you make money the day you buy? And if price goes up in the future, you make even more? Buying at below market value limits your risk and enhances your return.
In order to do that, you first need to know the market value right? Take me as an example. One of my strengths in this business is my detailed understanding of market prices in Jersey City. This goes beyond just going online searching for some computer-generated price estimates (e.g. Zillow Zestimates).
I know what houses have been sold recently in what conditions; what house features (e.g. parking spaces) are crucial; and which streets are better than others even though they can be next to each other.
How do I learn all these? For things like the sales data, I can just go online to get such information. For subjective things, nothing beats a personal walk-by or a drive-by the neighborhood. You can easily feel the vibe the neighborhood. If you choose to invest in your backyard, you can do this too!
A lot of times when I purchase houses from a bank or the bank is the decision maker in the transaction, the bank assigns a representative to handle the sale. I don’t know exactly how a bank chooses their officers, but I have dealt with officers from West Coast even though the house is on the East Coast (New Jersey).
Real estate is a very local game. For example, I know Jersey City very well by now. I can remember the neighborhoods and their prices by heart. Meanwhile, if you ask me about a property in a neighboring town like Elizabeth, which is only 15 minutes away. I will say I am uncertain about the price until I spend some time looking at the town. Ask a serious investor in Elizabeth, and he or she will say the same about Jersey City too. To truly understand the values, you have to investigate the neighborhood, both online and on-site.
Let me ask a question: Who is likely to know more about the property’s worth? A guy like me living in the neighborhood day-in and day-out and continually paying attention to my market, or a bank “professional” who may be 2,000 miles away sitting in front of a computer? =)
Access to good deals
Relying on our understanding of the market is not enough. You will need to take action and to buy houses in order to make a profit! An equally important part to our success is having the opportunity to buy. Right now, in my area, real estate investing is quite hot so it is challenging to find good deals. Good deals fly off the shelf almost as soon as they come on. Because of that, I spend quite some time in locating deals.
My recipe is to source deals from real estate agents. I prefer to get deals from agents as opposed to homeowners because it is more repeatable. I like to develop long-term, mutual relationships. Usually a homeowner only has 1 house to sell, but a good agent can easily have 10+ houses to sell over the course of time. To me, cultivating relationships with agents is essential.
What do all these have anything to do with being a local expert?
Just like any other relationships, perhaps the best ingredient to build a relationship is TRUST. For the relationship to work, the agents need to trust you.
- Why do the agents think you can and will close a deal?
- Do they know that you are serious?
- Are they convinced that you know what you are doing?
Being a local expert allows you to be knowledgeable and more genuine. That’s how you build trust. Think in the real estate agent’s shoes. Which person sounds better: an investor in Jersey City, who buys in West Bergen, stays away from Ocean Ave, particularly likes houses on Glifford Street, or, a buyer who claims he will buy in Georgia, or Idaho, or California, or anywhere in the United States? The more precise you can describe what you invest in, the more the agent will see you as a real person, a person who commands respect, and a person who he or she will want to build a relationship with.
Being a professional, knowledgeable real estate investor will make you stand out from the crowd. Of all the possible Farm Areas, your backyard has to be the Farm Area that you can master in the shortest period of time. You live there day in and day out. Use this to your advantage!
As you speak with real estate agents, often they may not have a good deal for you at that moment. That doesn’t mean all efforts have been wasted though. The good thing about real estate agents is that they always keep on looking, and you want yourself to be on top of their list whenever they come across a good deal. The easier they can establish a link between you and their potential deal, the better. Say you mention to the agent that you like Glifford Street. When she comes across a house that is on Glifford Street, guess whom she will call first?
It is like a search engine, people mostly click on the top link. How can you make your website to become a top link? Your website will be a top link when what your site delivers is most relevant to what the user searches for.
You want to be on your real estate agents’ top link.
Remember, real estate agents are your key to success. Build long-lasting relationships with them. Provide genuine value to your agents by sharing your expertise and by closing deals (that’s how commission is made!). You will be handsomely rewarded with more and more great deals!
What if your place is not a good investment area?
You may think that your backyard is not suitable for real estate investing: price is too high, no rental market, market is too slow, market is too competitive, neighborhood is too rough, and neighborhood is too nice.
There are several ways to solve it.
Workaround #1: Find your “alternative” backyard.
Even though it may not be your backyard, you can at least target areas where you already have a strong connection. For example, it can be a town where you grew up in. It can be where your best friend grew up in, or it can be an area where you know someone who are doing real estate already. The list goes on and on.
For example, one of my friends was in New York and was looking to acquire cashflow properties. The thing is that New York City has almost no such opportunity; houses are way too expensive. Yet she is very determined to make this happen. So for her, she chose to buy houses in Florida. Even though it’s a 3-hour flight for her, she can handle most matter because her parents live in Florida.
After all, a key part of the success in real estate is being an insider, knowing the right people, having the right team, and having the right information. If I had to choose whether I invest in the hottest market but have no prior connection to it, versus a so-so investment area but I know the in’s-and-out’s of the area. I will choose the second one all day long.
Why? Because you need your eyes and ears to understand the latest dynamics of your target area. You also need someone that you can count on whenever (even though unlikely) big issues pop up. Your connection and your in-depth knowledge will make your business runs much smoother. In my friend’s case, her eyes and ears were her parents’.
Who are yours?
Workaround #2: Grow, and grow instantly
As we talk about earlier, a major reason why you want to stay close to your target area is because most people start off small. You really need to reach a certain size before you leave your Farm Area. Say you have a 30-unit apartment building. It doesn’t matter where you live and where your building is. If your apartments units are cash-flowing property, you should have enough money to hire professional vendors like handyman, property managers, accountants, and still make a profit.
The question is: How can I get to that size? If I can’t even find my first property in my area, how can I build myself a portfolio of properties to expand my Farm Area? It is a chicken-and-egg dilemma.
A good way is using leverage. Leverage is utilizing other people’s strengths to help achieving your goal much quicker. You can join forces with other people, where they share the same issue with you. Do you know any fellow real estate investors who are close by and also invest in the same area as you? If you don’t know any, go out and network to find some. Again, economies of scale.
Take property maintenance as an example. It is much harder to find a property manager who does a good job for your properties if you have 1 unit than if you have 10 units. (Key phrase is “doing a good job” – it is easy to find a random property manager regardless of the size). Based on my experience, property managers become so much more open with me once I have reached a decent number of properties.
Rather than saying I have a property that requires property management, say you and your real estate partners have 10 units that need regular maintenance. Try contacting some property managers and see the difference yourself.
(P.S. An important reminder: Always tell the truth. Never exaggerate the numbers for more than you and your partners truly own. Some property managers are pretty smart. They can tell how big you are based on how much work you give them regularly. They won’t be too happy if they find out that you lie.)
Collaborating with other fellow investors and plugging yourself into their systems are great ways to grow instantly. Remember it is a two-way street: make sure you deliver your value to others, and be a contributing member of your team. Pay your dues, volunteer to be the one reaching out etc. and you will be loved amongst your group.
Workaround #3: The old-fashioned way
Finally, there is always the most direct way of solving the location issue.
MOVE to the backyard that you want to invest in. Turn your investment area into your backyard!
Before you say you will never ever be able to see your friends and families again, let me remind you that we are only talking about minor adjustments. We are not talking moving from east coast to west coast (I did). We are only talking about a move within 25-30 miles, where you should still be able to easily commute back to where you were originally at.
I was in this situation when I started buying properties. At that time, I lived in Time Square, Manhattan, New York, home to the world’s expensive condos. My goal was to acquire cashflow properties, which rely on cheap inventory. Where I lived clearly did not fit my goal. New York rents were high (now even higher!) but were still not enough to cover the even more expensive mortgages for these condos. There was nothing for me to buy in my “backyard”.
So I decided to move to a nearby city called Jersey City. I still enjoy the short commute to New York, as Jersey City and New York is conveniently connected with subway trains and buses.
Jersey City has exactly what I need. On one hand, it is still very close to New York. In fact, certain parts of Jersey City are closer to Financial District New York than that of some parts of “true New York”. On the other hand, in Jersey City, there are ample opportunities where houses are much cheaper than their New York counterparts and fit my budget and investment criteria.
I will give you some more examples. These are cities where they are “too expensive” to invest in, and their neighboring cities that are much more affordable and are within 30 minute driving.
From: New York, To: Jersey City, Bronx, Parts of Brooklyn
From: San Francisco, To: Oakland
From: Chicago, Miami, To: You don’t even have to move, neighborhood varies a lot within the city anywhere from luxurious condos to bargain purchases.
Don’t let where you currently reside dictates your future. Live to better yourself. Take actions. Make a move! (pun intended).
Have fun investing in your backyard. =)