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6 Reasons Why You Shouldn’t Go Out of State to Invest in Commercial Real Estate

Sunny Southern California is surrounded by some of the most prestigious real estate markets in the country including San Diego, Orange County and Santa Barbara. Although you could use these expensive markets as a reason to stray out-of-state for your next investment, it is also important to recognize the benefits of staying in-state to do your real estate investing.

1. Stay Close to Your Property

Capitalization rate in California has been compressed since the end of the last financial crash. This has resulted in investors seeking opportunities outside of the state to yield a higher return. In all asset classes, “better deals” are thought to be available nationwide, especially when assessing non-corporate office assets and apartment buildings. However, this has created a conflict for many property owners – unless they are developers or multi-unit owners, they most likely manage the property on their own. Investing in an out-of-state property makes it difficult to visit the asset and keep up with tenants, specifically in a time of crisis. Investors have begun to complain about the financial burden of travel plus the financial loss of not being able to attend to property matters promptly. These difficulties are causing a shift in investors’ mindsets, so it’s no longer ideal to invest in a real estate asset that you cannot drive to within one day.

2. When in California You Benefit from Development Constraints

This benefit is only related to coastal markets – thanks to the ocean, real estate development is limited on how far developers can extend their development projects. This creates the idea that these coastal markets have much more open-space compared to surrounding markets, such as states like Arizona, Utah, and Nevada. With an increasing population and continuous development, coastal cities in California can maintain their prestige – properties will remain limited assets, preserving the value of each property.

3. Prevent Long-Term Damage

This goes in line with why you should stay within driving distance of your property – you never know the true damage of a reported problem to a building until you see it. This is especially true when considering the damage that unanticipated problems such as storms, floods, or fires can inflict on your building or property.

If you are aware of potential trouble before it strikes, you can be prepared. In the event of heavy rain or fire, which are the two most troubling issues for California properties, you can prepare the property appropriately and ensure that you have trustworthy vendors available in case any damage does occur. If you are living outside the state from your property, you may have less insight on the true problem and have fewer relationships with potential vendors that can help you. In the end, staying close can prevent long-term damage to your property.

4. California Brings Security Which Equates to Higher Yields

Yes, the price points for properties in California are higher – however, as a long-term strategy, this can promote higher returns. There is less risk in California and the stability of the market has a long-time track record – even during the financial crisis of 2007, many properties were hit less compared to secondary and tertiary markets. When assessing which market to pursue, you want to analyze what is driving that specific market: Is it recent policies that are impacting CRE, or does the identified market have a long history of providing real estate investors positive returns?

5. Understanding the Market

The truth is that whether you are a seasoned investor or new to the game, you are knowledgeable about your local market. You have been around during economic ups and downs, you have witnessed which businesses have succeeded and which ones have failed, and you have been up-to-date on state policies that may impact your investment. Your knowledge, whether you recognize it or not, gives you an advantage in your local market in comparison to out of state investors. This means that you can identify the best deals and negotiate the best terms, ultimately creating an optimal investment for your portfolio.

6. Take Advantage of the Weather (Again, For Those in California!)

Weather can be severely destructive to properties, creating a financial loss for property owners. Not only are they often responsible for the damage caused by say a snowstorm or hurricane, but they are often constantly losing money in the aftermath of the severe weather due to a missing tenant. Properties in California, thankfully, are not at risk to inclement weather damage as some of its surrounding states – there is minimal rain and snow, no hurricanes or tornadoes, and a majority of the year brings conservative weather patterns. This has created a lower risk investment for those residing in California.

What To Do As A California Resident…

Invest locally. Although the capitalization rate may be enticing in the surrounding states, the aforementioned reasons provide evidence as to why investing locally can benefit you. If you are looking to fulfill a 1031 exchange or you are seeking an asset that can provide you with passive income, ensure that you are selecting a market that can help you meet your cash flow goals.

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