The Noam Elimelech, on parashath Lech Lecha goes into the idea and explains that it refers to prayer. When one prays, one should picture before his eyes as if he stood in the holy temple in Israel, and direct his prayers to the Holy of Holies. If one prays like so, one is actually in israel and is considered one who has a God. If when we pray, we don't attain this level of imagining the proper experience, then we are compared (has v'shalom) to one who lives outside of Israel and has no God.
A couple of similar statements are said about tzaddikim. One is that tzaddikim live in the time of Moshiah. Because they live their lives with such piety, they are said to actually live in a constant revellation of Moshiah. Similarly, tzaddikim are called Shabbath, because their lives are lived in a level of holiness congruent with Shabbath. Tzaddikim truly transcend time to such a degree that even at the end, in death, they are still living. (Another teaching of Chazal)
From these various statements of Chazal, we can see how much our present location (spatial and temporal) and condition is dependent on our state of mind. On where we strive to be. If we so much want to be in Israel that we imagine it around us, in a sense that is where we actually are.
For myself, this fuzziness of space was what helped me get through the first years of my Aliyah, when my family was far away in the USA, I knew that they were really with me, and I with them, both because we wanted to be together and because they wanted to be here in Israel as much as I did.
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