Investing is a very personal situation where each individual’s likes and dislikes, comforts and discomforts directly influence their rate of return on an investment. One of the biggest influencers on a rate of return in real estate investing is that people often build a mental geographical comfort zone around the area they like to work. These individuals cannot envision buying an asset where the collateral is located in some town in the Middle America that they have never visited. But these same people will buy stock in a company located half the way around the world, run by people they have never met and selling a product they don’t use or even understand. They trust Wall Street, but not Main Street.
Many investors treat real estate differently in that they feel the need to touch, feel or see real estate personally. Do you see yourself having this problem?? Are you missing out on great opportunities because you have a geographical comfort zone?
Now that is not to say that there are some geographical areas you wouldn’t want to invest in real estate. You should always be attuned to job growth, crime rates and population. By geographical, I am referring to investing in assets where the property is out of state but in a working class neighborhood.
The level of risk an investor is willing to take is usually what is creating their geographical comfort zone. If you find yourself looking for property a short drive from your home so you can see and feel the property, you have a low geographical comfort zone.
The problem with this type of investing strategy is that often you can earn a better rate of return on your investment for the same money if you invest in non-local markets. Do you think Warren Buffett just invests in Omaha? This type of investor realizes they don’t need to personally see or touch the property but rather instead, have learned to trust and rely upon third-party experts to be their eyes and boots on the ground to provide them with the information they need to make an informed decision. Yes this type of investor might have been a little nervous the first time he invested outside of his local market, but he engaged in this investment strategy because the deals were better and they provided a higher rate of return for the same capital investment.
When that investor bought a performing note, they were interested in the price of the note, the value of the note, and the value of the underlying asset. As long as the collateral is insured and worth more than they have in the deal, does the investor care if the property is in New York, Illinois, Ohio, Florida, or Tennessee?
In other words, if we are receiving monthly cash flow and yielding 9% per year through the $80,000 purchase of a seasoned $90,000 performing note secured by a $120,000 property, do we really need the property to be within driving distance? Do we really need to drive by it ever day to check on it?
As a note investor the property in the investment is just the collateral you have if the note goes unpaid. We do need to establish value for that collateral but you don’t need to have to drive by it or touch it.
When an investor realizes that investing in real estate-secured notes is not driven by location and that the numbers of the investment drive that investment, they become more like Warren Buffett. If a note investor can overcome their geographical comfort zone, then their marketplace is nationwide and they have the opportunity to increase their rate of return to a level higher than they can realize in their local market.
We would love to hear your thoughts.