And now for four final installment:

Commandment #10: Thou shalt not chase after riches in faraway lands.

I recall teaching some classes on a road trip through southern California at the beginning of the last real estate boom. I was trying to teach about projecting and analyzing cash flows, but all that anyone wanted to talk about was if I knew of any good houses to buy and flip in Las Vegas. I’m from Connecticut and I wouldn’t know Las Vegas if you parachuted me smack in the middle of it. Ok, maybe all those casinos would give it away.

I’m not sure how much my audiences took away from those classes, but I think I learned something at least, and that was to beware of “the grass is greener” syndrome (if indeed grass grows in the desert).

Just as some equity investors can’t seem to resist chasing after the latest hot stock, it is also true that some real estate investors can’t resist chasing the latest hot market. There are any number of reasons to question the wisdom behind this enthusiasm, not the least important of which applies equally to stocks and to real estate: By the time you or I hear about what’s super-hot, the real money has usually already been made. That sounds like a jaundiced point of view, but, in reality, if an apparently great opportunity has become general knowledge, then it has probably been picked over pretty thoroughly.

There are other good reasons to think carefully before buying real estate investments that are in a far-off and unfamiliar place. The most obvious is that they are in a far-off and unfamiliar place.  Let’s take that in two parts:

Far-off: If you’re like most entrepreneurial investors, you probably feel that you have greater control and less expense if you stay on top of your properties personally. “Hands On” is the operative phrase. But what if you purchase a seemingly great property that’s located two times zones away? You won’t know if your retail tenant has placed a “going-out-of-business” sign in the window in the middle of his lease, and you won’t know if an apartment tenant has piled garbage and old furniture in front of your building. There’s a lot you might not be aware of because you’re unable to keep an eye on the property, so you must necessarily rely on third-party help to accomplish virtually everything. The boots on the ground aren’t yours. If you’re feeling a little uneasy about that, it means you still have your wits about you.

A dose of realism may be especially in order if you have not actively managed property at home, but are now choosing to hire a third party to do it for you in a far-off place. Can you judge if your outsourced management is doing a good job?  Are they part of your solution or part of your problem?  Can you tell from far away what’s really going on?

Of course, you may prosper with your investing and come to own many properties with many tenants – too many to manage entirely on your own.  Then you’ll need to depend on a team of property managers, leasing agents, contractors, bookkeepers and others to help you handle the job. You’ve gotten too big to do it all yourself. It’s the price of success; live with it. But keep in mind that you can get big while staying local. Sticking close to home can remove at least one wild card from the deck.

Unfamiliar: I’ve used this little sound-bite so many times that I’ve probably worn it out; but please tolerate it one more time: Buy in a place where you know the cracks in the sidewalk. Investment properties don’t exist in a vacuum. They live in neighborhoods, in markets. Hence it is to your advantage not only to invest in a location that is physically proximate, but also one with which you are personally very familiar.

It’s easy to underestimate how much knowledge you have about your own community, because that knowledge tends to grow by a slow process of accretion, like a stalactite. Because you live in the area and you talk to people, you know that demand for apartments in a certain neighborhood has been growing recently, apparently at the expense of buildings just a few blocks away. You know that retail businesses seem to turn over constantly in a particular strip mall, but are more successful and stable in other centers; and of course there is that one spot where no restaurant seems to last for more than a year. You keep a close watch on local politics and you know how much or how little the folks currently in power are willing to do to encourage local economic development. You have a sense as to whether the Planning and Zoning Board will ever let anyone build anything without running a three-year gauntlet, and if so, what it is they might approve.

You know what’s going on because you have your ear to the ground; but unless you have very large ears, that’s hard to do if your property is half a continent away.

Our takeaway from this tenth commandment? If you are relatively new to real estate investing, or if your holdings don’t yet qualify as an empire, then your interests might be best served by staying local and capitalizing on what is observable and familiar. Minimizing the uncertainties of “distance investing” will give you a chance to build experience and success along with your portfolio.  Perhaps then, well seasoned, you can consider taking your show on the road.

Previously: Ten Commandments for Real Estate Investors: Commandment #9

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