Looking beyond: Investing out of your area

The truth is that the best real estate prospects do not always exist in your area or local market.  You may have heard the adage "all real estate is local".  And with over 400 markets across the United States, some become more attractive than others as they progress through their respective market cycles. That is, at any given time, there will be markets that provide a higher possibility for cash flow and/or appreciation.

There are numerous benefits to investing in markets that make the most sense:

Lower prices

Lower prices do not necessarily imply that cheaper is better.  Every market has its own price range of high and low-cost houses.  Take this for example; The median price of a three-bedroom house in San Diego, California will be significantly higher than the median price in Kansas City, Missouri.

With your limited investment resources, you will be able to buy more income-producing properties in lower-priced markets than in higher-priced ones.  This is how you may use your investment funds to boost your cash flow, rate of return, and overall number of properties in other markets, thereby diversifying your portfolio.

Higher and better returns

When you analyze rent-to-value ratios around the country, you'll see that many markets are "over-priced" in terms of property values relative to rental income provided by such properties. Because of the lower rent-to-value ratios, you will typically have smaller cash flow and a lower return on your investment.

Again, consider San Diego, California, which has a median sales price of $463,050 and a median rent of $2,550.  This is a low rent-to-value ratio of 0.5%, which will result in a low rate of return.  At the time of writing, capitalization rates were between 3% and 6%.  You can do so much better!

Better cashflow

Investing in markets that make more sense than a market you're considering because of convenience or proximity to you will often result in an increase in cash flow.  Again, looking at the rent-to-value ratio is a straightforward approach to evaluate markets and determine their potential.

Diversification

Financial advisors and stock traders frequently use the phrase "diversification."  However, the word is rarely used when discussing real estate investing.  Diversification, regardless of investment, aims to lower the investor's overall risk.

Diversification in real estate is simply accomplished by owning income-producing properties in various markets around the nation. In some circumstances, investors buy property in other nations. They decrease their risk exposure by building an income-producing real estate portfolio across numerous markets.

Because real estate markets do not fluctuate in value at the same period or rate, diversification allows investors to decrease and limit their risk.

Finally, real estate investors should be aware that diversification tends to diminish the upside and downside potential of their portfolios. That may seem counterproductive, but keep in mind that investors want to diversify their real estate portfolio to protect it from a variety of economic scenarios. They wish to avoid being limited to a particular market.

Consider conducting a simple and quick analysis of your own local (or favorite) market and comparing it to a few other marketplaces to determine the best chances for cash-flow and return on investment. Simply looking at the median purchase price, affordability, and R/V ratio can provide you with a good notion.