The simple fact is that the best real estate opportunities are not always found in your neighborhood or local market. You may have heard the saying, “all real state is local”. Well, with over 400 markets around the United States, some markets become more favorable than others as they transition through their individual market cycles. That means that at any given time there will be markets that offer you better opportunity in terms of cash-flow and/or appreciation potential.
There are many advantages to investing in markets that make the most sense:
Lower prices are not a suggestion that cheaper is better. Every market has its own price range of high and low priced properties. The median cost of a 3-bedroom house in San Diego, California will be a lot different than a median priced house in Kansas City, Missouri.
With your limited investment capital you will be able to purchase more income-generating properties in lower priced markets than you can in more expensive markets. This is how you can leverage your investment capital to increase your cash-flow, rate of return and the overall number of properties in various markets to diversify your portfolio.
HIGHER AND BETTER RETURNS
When you compare the rent-to-value ratios of markets around the country you will quickly see that many markets are “over-priced” in terms of property values related to the rental income generated by those same properties. The result is often lower cash-flow and always a lower return on your investment because of these lower rent-to-value ratios.
Again, let’s take a market like San Diego, California with a median sales price of $463,050 and a median rent of $2,550. That’s a low rent-to-value ratio of 0.5% and will result in low rate of return. At the time of this writing we are seeing capitalization (cap) rates between 3% and 6%. You can do much better!
BETTER CASH FLOW
Often you will see your cash-flow increase by investing in markets that make more sense than a market you may be considering because of convenience or proximity to you. Again, looking at the market’s rent-to-value ratio is a quick way to compare one market to another and get a good idea of its potential.
You normally hear the term “diversification” from financial planners and stock brokers. But you don’t hear the term used often when it comes to real estate investing. The goal of diversification, regardless of the investment, is to reduce the investor’s overall risk.
Diversification in real estate is easily achieved by purchasing income-producing properties in different markets around the country. In some cases, investors even purchase property in other countries. By creating a real estate portfolio of income-producing properties across multiple and separate markets, they reduce their exposure to risk.
Because real estate markets don’t move up and down in value at the same time, or at the same rate, investors can reduce and limit their risk through diversification.
Finally, real estate investors should also realize that diversification tends to reduce both the upside and downside potential of their portfolios. That may sound a little counter-productive but remember, the reason investors want to diversify is to protect their real estate portfolio under a range of economic conditions. They want to avoid being committed exclusively to a single market.
Consider doing a simple and quick analysis of your own local (or favorite) market and compare it to a few other markets to see where the best opportunities are for cash-flow and return on investment. You can get a good idea by simply looking at the median purchase price, affordability, and R/V ratio.