Should You Focus Your Real Estate Investments on Your Local Market?
Market conditions on Central Vancouver Island have risen to a level where finding cash-flowing residential properties without a sizeable down payment is nearly impossible. If you are able to find a good opportunity, the return is likely to be modest. Essentially at this point in the cycle, you are betting on capital appreciation, which may be fine for you if you have a long term investment horizon (10+ years), but if you think your holding period may be shorter you are definitely taking some risk with an increasing number of signs pointing to the fact we may be closer to the top of this cycle than most think. If this is your market of choice, what do you do, sit on the sidelines and wait for a correction? Not a bad approach if your investment capital is earning a return in another asset class. However, if you are looking to put your money to work in the real estate sector, harnessing the benefits of leveraging what only real estate can offer, investing beyond your local market could be a solid option. If you have historically managed all of your own properties, it may actually be a blessing in disguise, exposing you to the benefits of having your properties professionally managed while you have more time to enjoy your life.
At a fundamental level, no matter the asset class, investing is about securing the highest return for a given level of risk. When fund managers look at publicly traded companies, they typically evaluate the risk/reward characteristics of the security, in addition to the financial performance and future expectations for the company, among other considerations. The location of the head office or the markets operated in are less of a factor if the company rates high across all other areas of consideration. For the most part, investors are OK with that, because there is company management ensuring ongoing operations are smooth, and potentially a fund manager, or your portfolio manager/investment advisor continuing to monitor the financial performance of the company.
From strictly a risk/return perspective, real estate should be no different. For a given level of risk, where can you secure the highest return? Since real estate is location specific and cyclical, the real estate cycles are not occurring concurrently. While BC has boomed, some parts of Alberta have been hit hard over the past few years with declining oil prices. There have been points in the past where Alberta has boomed while BC was slumping. What is important is to identify locations that are fundamentally strong – solid employment base, low vacancy rates, strong infrastructure, growing population, etc., then once these core requirements have been satisfied, look for the locations that will produce a solid return with strong future growth prospects. Once you have identified a few target locations to invest, contact a few local property management companies, do some due diligence and find one you have a level of comfort with prior to seriously pursuing any properties. Since property management will be your boots on the ground and ultimately play a significant role in the success of your investment, take as much time as you need at this stage, asking for references, a property plan, their policies, procedures, and cost structure, etc., whatever you need to satisfy yourself that they will do a good job for you. They may even be a good resource in addition to an investment focused Realtor to point you in the direction of the best areas to invest, where rents are strong, vacancy is low, and the future outlook for the neighbourhood is strong.
While I understand there are many different ways you can invest in real estate and succeed, the long-term, buy and hold approach in strong areas on the upswing offering solid cash-flow, lends itself to some geographic diversification. Simply not having all of your eggs in one basket alone will better position you for success, let alone the opportunity to secure a better return in other markets.
While there is a level of comfort in being able to drive by and check on your properties at your discretion, what you really have to ask is whether this added convenience is really worth the cost. In most cases, I would argue it is not. After all, you may well have investments in your portfolio around the globe, and it is pretty unlikely you are traveling to meet with the executives and touring operations on a regular basis to ensure your investment is safe. Why would you? There are measures in place, such as management and regular reports, to ensure you have the information you need to know what is happening with your investment. Real estate is no different. It is an asset class, and a great one at that, with a proven track record of helping people from all economic and professional backgrounds, build wealth and position themselves for a comfortable retirement.
If you are considering an investment in real estate, put our full-service advisory team to work for you. Contact us anytime for your complimentary consultation at 250-751-0804 or firstname.lastname@example.org.