Are you thinking about investing in commercial real estate but aren’t sure if you should invest locally or look for opportunities further away? Commercial real estate is a great way to increase your financial portfolio and create multiple streams of income. But, there are different things to consider when deciding whether the local real estate market or long-distance real estate investments make the most sense for your particular situation. In this blog post, we’ll dive into the advantages and disadvantages of both local and long-distance commercial real estate investing so you can make an informed decision as to which might be better for meeting your investment goals.
Local vs Long Distance Commercial Real Estate Investing refers to the comparison between investing in commercial properties within one’s local area versus investing in properties located in distant markets. It involves analyzing the advantages, challenges, and considerations of each approach to make informed investment decisions in the commercial real estate sector.
- Location plays a significant role in commercial real estate investing. Local investments offer benefits such as proximity for management and market familiarity, while long-distance investments provide opportunities for diversification and access to potentially higher-yielding markets.
- Both local and long-distance commercial real estate investing have their own set of pros and cons. Local investments allow for greater hands-on control and knowledge of the market but may be limited by local market conditions.
- Choosing between local and long-distance commercial real estate investing depends on individual goals, resources, risk tolerance, and investment strategy.
Pros and Cons of Local Commercial Real Estate Investing
- Familiarity with Local Market Conditions: Investing locally allows you to leverage your existing knowledge of the local market conditions. You’re likely familiar with the demographics, economy, and other factors that influence property values and demand. For instance, if you live in a town with a thriving tech industry, you may understand the demand for office and coworking spaces better than an outsider.
- Access to Local Networks and Resources: Investing in your local area can also provide you with better access to local networks and resources, including local brokers, a property manager, and other professionals. These connections can provide valuable insights, support, and services that can help optimize your investment. For example, a local broker might have inside knowledge about upcoming developments or zoning changes that could affect property values.
- Easier Property Management and Oversight: Investing locally offers the advantage of proximity. When you manage the property yourself, overseeing maintenance, repairs, and tenant interactions becomes much more convenient. Plus, having your investment property nearby allows you to swiftly address any issues that may arise, such as maintenance emergencies. This not only helps maintain positive tenant relationships but also minimizes downtime effectively.
Disadvantages of Local CRE Investing
- Limited Investment Opportunities: One potential disadvantage of local investing is that it may limit your investment opportunities to what’s available in your local market. If your local market is small or if it doesn’t offer the type of properties you’re interested in, your investment options could be limited. For instance, if you’re interested in investing in industrial properties, but your local market is predominantly residential, you may struggle to find suitable investment opportunities.
- Concentrated Risk in a Single Market: When all your properties are in the same geographical location, your investment portfolio is exposed to the economic risks of that single market. For example, if a major local employer closes down or the local economy takes a downturn, property values, and rental demand could decrease across the board, potentially impacting your entire portfolio.
- Lack of Diversification: Investing locally also means that your real estate portfolio may lack geographical diversification. Diversification is a key risk management strategy and having properties in different markets can help shield your portfolio from localized economic downturns or real estate market fluctuations. If all your properties are in the same local market, you won’t have this protection.
Pros and Cons of Long Distance Commercial Real Estate Investing
- Access to a Broader Range of Investment Opportunities: With long-distance investing, you are not limited by the opportunities in your local area. You can invest in any market around the country, or even internationally. This can provide you with a larger pool of potential properties to choose from. For instance, if your local market is saturated or property prices are too high, looking into other markets could present more affordable or varied investment options.
- Potential for Higher Returns in Emerging Markets: Some markets may offer higher returns than your local market, especially emerging ones. Cities or regions experiencing rapid growth or redevelopment may provide promising investment opportunities with higher potential returns. For example, a region with a booming tech industry may see a surge in demand for office spaces and co-working facilities, leading to increased rental rates and property values.
- Increased Diversification: Investing in properties in different geographical locations adds another layer of diversification to your portfolio. If one market experiences an economic downturn, properties in other markets might remain stable or even appreciate, cushioning potential losses.
- Limited Knowledge of Local Market Conditions: Investing from a distance means you may not have a deep understanding of the local market. You might lack firsthand knowledge about factors like local property laws, property values, demand trends, and community features. For instance, a market may look promising because of its high growth rates, but without local knowledge, you might not be aware of upcoming regulatory changes that could impact your investment.
- Challenges in Managing Properties Remotely: Property management can be more challenging from afar. Dealing with repairs, tenant relations, and regular property maintenance can be difficult when you’re not there to oversee things in person. For example, if a tenant reports a maintenance issue, it might take longer to address the problem, potentially leading to tenant dissatisfaction.
- Dependency on Local Partners or Property Management Companies: Given the challenges of managing properties remotely, long-distance investors often rely on local partners or property management companies. While these entities can be invaluable, finding reliable partners can be a challenge in itself. Also, their services will add to the cost of your investment, potentially reducing your net returns.
While long-distance commercial real estate investing opens up a vast array of opportunities and the potential for higher returns, it’s important to understand the unique challenges it presents. Thorough research trusted local partners, and possibly a reputable property management company can help mitigate these challenges and maximize the potential benefits of this approach.
Factors to Consider in Choosing the Right Approach
Investor’s goals and risk tolerance
When it comes to investing in commercial real estate (CRE), there is no one-size-fits-all approach. Any investor should tailor their strategy to their goals and risk tolerance level. New investors with limited capital and a low-risk preference might start by investing locally, where they can keep a closer eye on properties and understand the market better.
In contrast, seasoned investors looking for portfolio growth and higher returns might be more drawn to long-distance investments, despite the added risk and complexity. An investor’s timeline should also be factored in, especially when considering long-distance investments in emerging markets. To make informed decisions and navigate the complex world of CRE investing, it’s essential to work with experienced real estate agents who understand your unique goals and can help you achieve them.
Market analysis and research
Thorough market analysis and research are paramount in choosing the right approach. Investors should assess local and potential long-distance markets’ economic conditions, property values, rental demand, and growth prospects. For example, if the local market is experiencing a downturn while another city is seeing substantial growth, it might make sense to consider investing in the latter, even if it means managing properties from afar. However, if the local market offers promising investment opportunities and the investor is well-versed in this market’s intricacies, local investing might be the better approach.
Resources and ability to travel or establish local connections
An investor’s resources and ability to either travel or establish local connections can greatly influence their choice of investment strategy. Long-distance investing requires frequent travel for property visits, meetings with local partners, and market research. This can be time-consuming and costly. If the investor has limited resources or constraints that make frequent travel challenging, local investing might be more feasible. However, if the investor has the means to travel or can build strong relationships with reliable local partners, long-distance investing becomes a viable option.
Choosing between local and long-distance CRE investing isn’t a one-size-fits-all decision. It requires careful consideration of the investor’s goals, risk tolerance, understanding of different markets, and available resources. Whether you’re considering investing locally or venturing into long-distance investments, doing a thorough research and aligning the chosen strategy with your investment goals can lead to a successful real estate investment journey.
With this in mind, it is crucial to stay well-informed and up-to-date with the latest trends in the commercial real estate (CRE) industry for the year 2023. By staying informed, you can gain a competitive edge and make informed decisions. To further explore this topic, I invite you to read an article I have written where I delve into the key trends that will shape the CRE landscape in the coming year. Your journey to staying ahead starts here. Happy reading and stay ahead of the game!
Case Studies: Successful Local and Long Distance Commercial Real Estate Investors
A. Example 1: Local investor achieving steady returns in their hometown
Meet Sarah, a commercial real estate (CRE) investor based in Columbus, Ohio. Sarah has always believed in the growth potential of her hometown and decided to capitalize on her local knowledge. Here’s how she achieved steady returns:
- Market Knowledge: Being a local, Sarah had an intimate understanding of Columbus’s neighborhoods, zoning laws, demographic trends, and economic conditions. This allowed her to pinpoint where and when to invest to capitalize on the city’s growth trends.
- Strategic Investments: Sarah focused on investing in small to mid-sized commercial properties located in up-and-coming neighborhoods. She converted these properties into mixed-use buildings that attracted a diverse range of tenants, thereby reducing vacancy risks.
- Direct Management: As a local investor, Sarah could personally manage her properties. This hands-on approach saved property management costs and allowed her to build strong relationships with her tenants, which contributed to low tenant turnover.
- Community Engagement: As a Columbus native, Sarah engaged with the community and local businesses. This fostered good relationships and a positive reputation, which attracted prospective tenants and partners, contributing to her success.
Through her local knowledge and strategic investments, Sarah was able to consistently generate steady returns from her commercial real estate investments in her hometown.
B. Example 2: Long-distance investor capitalizing on emerging markets
Now let’s consider Raj, a CRE investor based in New York City. Raj decided to explore emerging markets across the country to diversify his investment portfolio and capitalize on high-growth areas. Here’s his success story:
- Research & Networking: Raj spent a considerable amount of time researching various markets. He also networked with local brokers, property managers, and other real estate professionals to gain insights into different regions.
- Strategic Partnerships: Raj established partnerships with reliable local property management companies in his chosen markets. These partnerships were crucial in handling the day-to-day management of his properties and overcoming the challenges of long-distance investing.
- Emerging Market Investments: After extensive research, Raj chose to invest in commercial properties in Austin, Texas, and Raleigh, North Carolina – two cities experiencing rapid growth due to tech sector expansion. His investments ranged from office buildings to co-working spaces.
- Diversification & High Returns: By investing in different types of commercial properties in multiple high-growth markets, Raj not only diversified his portfolio but also positioned himself to reap potentially higher returns than he might have achieved in his local market.
Raj’s willingness to venture into long-distance investing in emerging markets, his diligent research, and his strategic partnerships allowed him to capitalize on high-growth opportunities, thereby diversifying his portfolio and enhancing his potential returns.
These case studies illustrate how both local and long-distance strategies can lead to success in commercial real estate investing, given the right approach, resources, and market conditions.
Local vs Long Distance Commercial Real Estate Investing FAQs
What are the risks associated with local commercial real estate investing?
The primary risks associated with local commercial real estate investing are vacancy risk, tenant turnover, and changing market conditions. Local investors should be mindful of these risks when selecting a location and analyzing potential rental income.
Are there any tax implications or advantages specific to local or long-distance investing?
Yes. For example, local investors may qualify for federal or state tax incentives such as credits for job creation or property improvements. Long-distance investors may be able to take advantage of different types of deductions related to travel and other expenses associated with managing their properties from afar.
How can I manage properties remotely if I choose the long-distance investing approach?
The key to successful long-distance investing is finding reliable local partners, such as property managers and brokers. Building relationships with these partners can be a great way to manage properties from afar and ensure that everything runs smoothly. Additionally, taking advantage of technology such as remote surveillance systems can help you monitor your investments remotely.
Are there any success stories of investors who have chosen the local approach?
Yes. Many local investors have achieved success by leveraging their knowledge of the local market, investing strategically in up-and-coming areas, and managing their properties (like rental properties) directly. Local investors can also benefit from building relationships within the community, which can foster a good reputation and attract customers.
Can I invest in multiple local markets simultaneously?
Yes, you can potentially invest in multiple local markets if you can manage them efficiently. However, it is important to assess your resources and capabilities before taking this approach. Additionally, long-distance investors may be better positioned to diversify their investments by investing in a variety of markets simultaneously.
What factors should I consider when deciding between local and long-distance investing?
When choosing between local and long-distance investing, it is crucial to take into account your available resources, market expertise, risk appetite, and desired returns. Additionally, diversifying your portfolio by exploring various investment options in each market can prove advantageous. Lastly, remember to seek guidance from a professional real estate agent to make informed decisions.
No matter where you are in your real estate investing journey, both local investments and long-distance investments have unique benefits and considerations.
Evaluate your goals and financial capacity to decide what kind of investment best suits you. If you need help or more advice on local vs long-distance commercial real estate investing, our experienced team is here for you. I’ll be happy to answer questions or provide assistance regarding different approaches to real estate investing. Call me today or schedule a free consultation for more detailed information.
At the end of the day, remember that when it comes to commercial real estate investing, location is key – so make sure you think critically and weigh all of your options carefully before making an investment decision.