Why Your Home Market May Not Be the Best Place to Invest

“Location, location, location” is a common mantra in real estate investing, especially in commercial real estate (CRE). While location is crucial, that prime spot may not always be in your local city or market.

The Familiarity of Local Markets

As CRE investors, we often default to our local markets when seeking and acquiring deals. These markets are familiar. It’s where we live, work, and have personal and professional connections.

Investing locally has its advantages. Being on the ground can help you identify value properties with above-market cap rates and returns on investment. Having ears to the ground can open the door to undervalued properties with substantial potential upside.

How Does Your Market Compare?

However, your local market may not always be the best place to invest. Perhaps your market is mature, experiencing extreme volatility, or simply stagnant.

When we say a real estate market is mature, we mean it has reached a state of equilibrium. Mature markets are static, marked by an absence of significant growth or innovation. Many investors are satisfied with this stability, but it may not offer the best returns.

The Challenge of Gateway Markets

Do you live near a gateway market like New York, Los Angeles, Chicago, San Francisco, or Boston? These cities are centers of long-established commerce and population. Investors are drawn to these bustling markets, leading to intense competition in the CRE space. Large private equity funds, REITs, and foreign investors often dominate these markets, willing to sacrifice cap rates and profits for security and liquidity.

Exploring Emerging Markets

Many investors, tired of so-so returns in bigger markets, are looking to emerging markets for better cap rates, ROI, and growth potential.

Even as investors move inland, they find stability and liquidity in secondary markets like cities in the Midwest and Texas, but with better cap rates and returns. This trend explains the recent exodus of California investors to the Midwest, where they can find properties in similar market segments at cap rates 100 to 150 basis points higher.

The Risk of Market Volatility

If a market is volatile, the temptation is to park capital and wait for recovery. Timing the market can be risky. Waiting too long might mean paying too much for an asset, while jumping back in too soon could result in immediate losses.

Why sideline your capital when there are emerging, stable markets ready for investment? These markets allow you to avoid holding cash that inflation erodes.

Impact of COVID-19

Not all markets were affected equally by the COVID-19 pandemic. For instance, Phoenix experienced higher foreclosure and eviction rates during the economic crisis.

Attom Data Solutions studied 500 U.S. real estate markets, ranking them by vulnerability to COVID-19. Metrics included foreclosures, homeowner equity, and wages. Of the 500 counties studied, 25 of the 50 least-vulnerable counties were in Colorado, Indiana, Missouri, Texas, and Wisconsin. These markets had lower levels of unaffordable housing, underwater mortgages, and foreclosure activity.

In contrast, the most vulnerable markets included New York, California, Connecticut, Maryland, Baltimore, Washington D.C., and Hawaii. Here, major homeownership costs consumed over 30% of average local wages.

Looking Forward

Location remains important, but many investors no longer limit their search to their backyard. If your local market is struggling, don’t sideline your capital. Keep your money working by exploring other markets across the U.S. or even internationally for better cap rates and ROI.

Before settling for the best location in your current market, consider other markets. The best investment opportunities might be somewhere you least expect.

Embark on your journey to real estate success today by exploring our upcoming events and immersing yourself in a community dedicated to education, growth, and prosperity.