Historically, real estate investing has been thought of as a
local’s activity. That is, you live in a community, you learn
the real estate market, then you invest in the community. For
some real estate investments, that may make perfect sense but
yet for others, it may be the worse thing you can do.
One place where this can be a terrible mistake is in
preconstruction investing. I am contacted on almost a daily
basis from people who tell me that “in their area”, it is
incredibly risky to buy preconstruction projects. They give
examples of a 2 bedroom condo going for over $0.5 Million while
only being able to draw $1,500 in rent. They tell me that if
they buy this property and the price drops, they may be looking
at either a large loss or a negative cashflow of -$1,500 or more.
Others tell me that in their area, no investors can buy
preconstruction projects since they are only sold to future
owners that want to occupy the residence. They want to know if
there are special ways to get around these kind of restrictions.
While there are potentially ways to skin this cat, you have to
start asking the question why would an investor want to do that?
What I have consistently found is that investors only consider
these options because they don’t want to pass up what might be a
“great” opportunity. In many communities, preconstruction deals
only come along once every couple of months and they will be gone
if you don’t act. Because of this, investors feel pressured to
take the deal, with all of its warts, instead of really deciding
if this opportunity fits their risk-to-reward profile.
Suppose we changed the picture a little bit... Suppose that an
investor had access to 20 potential deals per month, but they
were in a variety of geographic areas. Given that most investors
can only do 1-4 of these per year without running out of capital
and/or credit, then they could be VERY selective and take only
those deals that made sense. Of course, the first argument would
be that this deal is over xxxxx miles away from where I live so
how could I possibly do that.
So let’s look at this scenario, especially for preconstruction
investing. This is one type of investing where almost all the
homework and the actual investing activity can easily be done
long distance with a telephone and an internet connection. Once
made aware of a potential deal, then the investor simply must
decide 1) if the risk profile matches what they are looking for,
2) if the potential return is suitable, and 3), what their escape
path will be if things don’t work out well. With a little
training and getting used to it, this is something that one can
easily accomplish in an afternoon from afar.
Once the investment decision is made, then contracts are signed
and dollars are escrowed. At this point, the only necessary step
to take is to wait for the project to near completion, at which
time the investor may considering flipping the property or
preparing to close on it. Sometimes, this may take up to 2 years
to complete with absolutely no additional activity required!
Even if you were thousands of miles away, nothing else is needed
from you.
For people that flip the property, especially if they are long
distance, they enlist the aide of an agent that handles marketing
and all the other details. Again, this does not require a local
presence. About the only time when you may need actually be in
the same locale as your property is if/when you close on the
property and you have decided to rent it out. In this case, you
will probably need to line up a property manager and that is
typically best done with a face-to-face meeting so that their
other properties can be checked.
Once you realize that you are not bound by geography, then this
potentially solves two major problems: 1) my limit of deals
to consider is only set by the practicality of getting deals
presented to me and 2) if I don’t like the characteristic of the
deals in one area, who cares since there are many, many other
areas to consider.
For savvy investors, this can also help drastically cut the risk
of the perceived real estate bubble that has formed in some
areas. As an example, there are preconstruction deals out there
where only $1,000 is required to be put at risk on a property
that can easily support itself with rents. Some of these
properties have great appreciation potential with next to
zero risk.
So, the next time you are looking at real estate in your area and
it just does make sense to make an investment, maybe you want to
consider branching out and investing in other areas.
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