As published in Scotsman Guide's Commercial Edition, June 2006.
It can be difficult to invest at the end of a real estate boom. In highly valued markets, seasoned investors have seen drops in desirable property-capitalization rates. New, small investors are priced out of many local-market entry points. And as interest rates rise, some areas of the country are simply doing much better than others.
As a result, perceptions of greener pastures elsewhere are becoming a growing national phenomenon in income-property investment. More investors are looking at opportunities out of town. If you have "equity refugee" clients seeking values greater than those available locally, it helps to know how to give them the best guidance.
Assessing the viability
Any commercial property purchase will take your clients significant time, especially in the first 12 to 18 months. Buying out of town only increases the time commitment, including travel time.
Further, this process is not just a trip out of town; it is a stage in your clients' life. If they are about to see their first child off to college, are contemplating a job change or are facing a similar significant life event, maybe this isn't the best time to take on the challenge of an out-of-town property investment.
Be sure to ask about your clients' time frame. How long do they plan to own the target property? Out-of-town investing may not be the best strategy for clients who want to own a property for just a few years. It is harder to really know another market, and borrowers' expectations for a possible short-term value appreciation may not be realistic. Your clients likely will be in a more secure position if they invest for the long haul in a property with positive cash flow.
Sticking to what they know
Successful out-of-town investing also depends on having solid experience with a particular property type. The learning curve is already steep enough when an experienced multifamily-property investor takes on an office or retail building. Although investors may often want to escape the time and effort associated with owning a multifamily property -- even when it's run with excellent property management -- now may not be the time. While other property types may require less attention, your clients should not try to take on a new property type when it is in another city or state.
Doing the homework
Your clients should invest time before investing money. In short, they must do their homework. Do they really know the area? Have they visited it several times, preferably at different times of the year? They should thoroughly understand everything about the target property, the local communities and the regional economy.
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