There is such a boom of television broadcasts and investment managers pitching about all the great profits we can make doing fix and flips these days. Nearly all of what you see and hear is about doing it “in your hometown.”
While flipping in your hometown sounds wonderful and, furthermore, wise, it is not necessarily all it’s cracked up to be. On television, it looks great, but I think most of us already know there is nothing “real” about reality TV. For a lot of you, investing in your hometown may not be the best and brightest idea.
Here are the reasons that people think investing in their own backyard is a good idea:
- They can see the properties in person
- They can do due diligence in person
- They can monitor the entire process in person
Those are all good points, but in today’s world, they’re a little moot. In fact, I would go so far as to say that to a degree, they’re old fashioned. It’s old-fashioned logic that says you need to invest in your hometown and your hometown only.
Here are some reasons venturing out into the wider market could be a better option for you than investing at home:
1 | Location, Location, Location!
Even if you live in a bustling city, it may not be a good place to buy and sell real estate. In some large cities, individual investors simply cannot compete with institutional investors, who have more money and far smaller margins than you will. Not only will you likely be working in a far smaller margin of profits, but you’ll likely spend more time looking for deals than actually doing them because the “big fish” are going to bid higher than you can afford to go.
Suggestion: Be willing to get out of your comfort zone and your geographic area. There is probably a small town within two hours of you that is primed and ready for you to take on. You can spend less, make more, and not have to deal with the hundreds of other guys competing against you.
2 | If You Plan to Spend Big, Plan to be Broke
If you envision yourself doing highly custom, designer renovations like you see on television, envision yourself completely broke as well, please. These reality shows are fun to watch, but they are also a joke. Watching a cute couple in their hometown in southern California spend $400,000 to buy a three-bedroom two-bathroom house and then put in another $90,000 in repairs to flip it for $550,000 is not just unrealistic; it’s also not a very good deal. After closing costs and fees, they might net a 7 percent profit, which is not terrible, but it’s not scalable either. They could make much higher returns outside of the Golden State in an affordable housing market!
Consider investing in the driving force of our country, the demographic known as “blue collar housing.” This type of housing is the sector in highest demand and, furthermore, these buyers are the most likely to qualify for subsidized loans, making it easier to sell your flip.
Suggestion: Take the $490k that might have netted you seven percent with your designer renovation and buy five houses in an affordable market (even if it’s not your local market), make triple the profits, and have them all sold before that high-end renovation even makes it to market. Spread your risk among more properties at a lower price point and watch your margins go way up.
An example of this type of market is Coweta County, Georgia. You can buy a three-bedroom two-bath for $90,000. You buy the same house in Gwinnett County, Georgia for $225,000. It’s basically the same house, but the Gwinnett County one rents for just $400 more, giving the Coweta house a much better rate of return. It will probably be worth it to buy in Coweta even if you live in Gwinnett.
3 | You Have Fewer Feelings About Non-Local Markets
Emotions can be a very scary and an expensive thing. I harp heavily on keeping your emotions out of every stage of your investments and business. I see on a regular basis how people fail because they were too wrapped up in an investment on an emotional and personal level. I admit, I’ve done this myself a few times. Most of those times happened because I was investing locally. Getting out of your backyard will help to keep you from getting wrapped up in the small stuff. That saves time, and in real estate, time is money.
Suggestion: Be consistent with your process once you know it works. Don’t allow your emotions to dictate how you renovate. We do hundreds of rehabs every year and whether it is a $50,000 house, or a $550,000 house, they get the same shingles, same paint, same carpet and same fixtures. Obviously, there are always going to be some variances to allow for market preferences, but always remind yourself to, “keep it simple, stupid.” Doing a fix and flip is exciting and fun, but ripping out a wall because “I’d want it that way” is a recipe for disaster.
I can think of another 15 reasons (at least) why investing in your backyard is so frequently a bad idea, but these three are probably my favorite. The bottom line is you are probably sacrificing opportunities to mitigate risk if you do not at least consider markets other than your local one. Remember, you do not necessarily have to go far. If you live in Atlanta, for example, I can think of three really great investment hotspots within a two-hour drive of downtown and one of those is a pretty nice weekend getaway as well. Your bottom line will thank you!
Charles Sells is the CEO and founder of Platinum Investment Properties (PIP) and a regular contributor to Think Realty’s print and digital publications. He will be training investors on how to get the very best prices in their local markets using a variety of strategies at the Think Realty National Conference & Expo in Atlanta, Georgia, on October 14, 2017. You can reserve your spot in that session now by clicking here.