Investing locally is often ideal, but not always viable. Being in an area where the market isn't strong for investments shouldn't stop you from investing in real estate.
Owning real estate outside of your city, town, or even state can be a profitable investment if you know what to do.
Take a look at why investing in a rental outside of your local area may be a good idea and what to know before buying an out-of-state rental.
Benefits of buying rental properties out of state
The largest benefit of buying rental properties out of state is access to more affordable real estate. In most cases, these properties offer higher returns.
There are some places where the cost of real estate is expensive, making rental property investments out of reach. For example, the average property costs $671,400 in New York City, $548,700 in California, and $592,300 in Boston.
Considering the median household income is $60,879 in New York City, $71,805 in California, and $66,758 in Boston, investors in markets like these may benefit from investing in rental properties out of state.
There are dozens of markets across the country that have high rental demand, growing economies, and cheaper real estate. These factors make it possible to own a rental property and often mean better returns.
Additionally, some states have higher property taxes or property insurance rates than others. This can affect the overall profitability and return of a rental investment. Investing in markets with a low cost of rental ownership may increase the rate of return.
Even if your local real estate market is affordable, it may not be advantageous to own rental properties there. The market may be oversaturated and rental rates could be low. You may live in a market that isn’t growing economically. You could be in a rural area that doesn’t support owning a rental investment. Demand plays a large role in the profitability and success of a rental property.
Branching into new cities or states lets you invest in real estate where there's economic development, population growth, and higher rental demand.
There are many reasons to invest in out-of-state real estate, but there are also several points to be aware of before buying an investment property. Let’s explore the factors you should consider before investing in rental properties out of state.
Know the market
One reason people like to invest locally is that they're comfortable with their knowledge of the market. Having a strong understanding of how a market is performing, the demand for the rental property type, and what economic factors contribute to a stable investment market is incredibly important. If you invest out of state, you have to know the market as intricately as you know your own.
Look for growing rental markets
When searching for a new state or area to invest in, identify which markets have affordable real estate, high rental demand, and a growing economy and population. Several industry websites can help you find these areas:
Understand local laws
Be sure to research tax laws in the state you’re looking to invest in. Some states require you to pay income tax if you own profitable real estate. Others have local laws on rental properties (including rent control or stabilization). While the city may have demand and affordable housing prices, there may be other areas that would be better because of their more favorable landlord and tax laws.
Identify the ideal neighborhood for your property type
Next, identify the most suitable micro-markets within the larger metro area. Just because a city looks promising doesn’t mean the entire city makes sense from an investment standpoint. Identify desirable zip codes or neighborhoods that have jobs and amenities nearby and are undersupplied based on your desired investment property type.
Much of this information is readily available online and many investors choose to conduct their own market due diligence. However, for those with less time on their hands, it may be beneficial to identify a large target market and reach out to a local realtor who can help you identify the best micro-markets to target based on your investment desires.
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Get boots on the ground
Once you’ve found a state or city of interest, you need to find a rental property to invest in. There are several ways to find investment opportunities, such as:
- searching the multiple listing service (MLS),
- working with a local wholesaler or realtor, or
- finding a turn-key rental on a platform like Roofstock.
Evaluate every opportunity thoroughly. Factor in additional costs for a property manager, which we’ll discuss in further detail below.
Build a team
Another reason investors typically like to buy local properties is that they like the proximity. The ease of being able to visit the property or manage it firsthand is valuable.
While it may be convenient to have a rental property less than 30 minutes from your house, it’s not a requirement. I’ve owned 40+ investment properties and have seen less than 15% of them. I'm comfortable acquiring properties I’ve never seen in person because I have boots on the ground -- people I trust who can go to the property for me. Buying and closing on a property sight unseen may feel disconcerting, but it shouldn’t be. Build a team in your target market that includes:
- a knowledgeable realtor who has experience working with real estate investors,
- a quality handyman or contractor,
- a home inspector,
- a title company, and
- a reputable management company.
Typically, a skilled realtor can provide contacts for all the services listed above. Additionally, a realtor can send you pictures of the property or even give you a video tour before buying.
Always have an inspection done if you cannot see the property yourself. Remember, not all realtors are equal.
Thoroughly interview your prospective real estate agents. Ask what experience they have working with out-of-state investors or investors in general and look at the number of properties they closed in the past few months. You want someone with connections, experience, and local market knowledge.
Hire a quality property manager
A good property manager or management team is extremely helpful when owning real estate out of your local area. A property management company typically charges a percentage of rental income or a flat fee to assist in the day-to-day management of the rental property. They will
- help list, market, and show the rental to prospective tenants;
- screen any applicants; and
- handle deposits, leases, tenant issues, rent collection, and the coordination of repairs or evictions.
Similar to realtors, not all management companies are equal. Do your research on the company, look at its experience, speak with other clients, and look at its overall workload. If the company has too much to manage, it may neglect your property over time.
It’s also important to note that even a good management company cannot turn a bad rental property into a good one. Analyzing the market and the quality of the investment is your responsibility. There's always the chance the investment performs differently than expected.
Owning a rental property out of state doesn’t have to be intimidating. While owning property locally has its advantages, it’s not always the best way to invest.
Some concerns should be weighed before investing in a new area, but being informed of the risks and taking measures to mitigate them increase the likelihood of a successful investment.
By utilizing the help of a local team and conducting thorough due diligence on the market you're expanding into, you can diversify your portfolio and open up the potential of greater returns.