Buying an Investment Property Far Away? 7 Things to Consider

Owning real estate in your local area offers convenience and ease when it comes to management, but real estate prices and available investment opportunities mean it may not always be a feasible option.

Buying an investment property far away can be a great way to find cheaper real estate (which can provide a higher return on investment), diversify your portfolio into new markets backed by high demand, and access more investment opportunities because of less competition. But before you buy, here are seven things to consider.

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One of the major advantages of owning real estate in your local area is knowing the market intimately. You know the desirable areas, which neighborhoods are safe or unsafe, and have a general idea of rental prices or home prices.

When you buy rental property out of state, it may take a lot of legwork to familiarize yourself with the market. You can quickly get to know the out-of-town market just as well as your own, but it takes work. Hiring a local real estate agent can help you narrow down your zip codes or neighborhoods as you search, but success with out-of-area rentals largely depends on where you choose to invest, and that means you need to know the market well.

ALSO READ: Why Rental Property Investing Is a Top Passive Income Strategy

Self-managing a rental property is pretty common in the world of landlording, particularly if the property is located near your home. But if you buy a rental property outside of your local area, you'll likely want to outsource the property management to someone local. Most markets have several property management companies to choose from that can handle the entire process of showing the rental, leasing it, collecting the rent, and coordinating repairs or cleaning for a small fee.

Closings, cleanings, repairs, and inspections are all part of owning an investment property, regardless of where the property is located. It's a good idea to develop a team of contacts, including plumbers, lawn care professionals, cleaners, handypersons or contractors, inspectors, closing title companies, real estate agents, and other professionals within this field. That way, you have people on hand to call if and when their services are needed. Referrals and reviews will be the most helpful way to find qualified help.

State tax credits help landlords who own rental property out of state avoid double taxation on any rental income. However, out-of-state investors will be required to file a nonresident state income tax return for the state in which the rental property is located -- that's in addition to the state tax return due where they live (if income tax is required in either state). That's why it's a good idea to speak with your local tax advisor about the tax implications before you buy.

ALSO READ: How a Biden Income Tax Proposal Could Affect Real Estate Professionals

Property tax amounts can differ greatly from area to area. Even cities or counties that neighbor each other can have double-digit differences in their property tax rates. Before starting your investment search, know which states, counties, or cities have the cheapest and highest property tax rates. If you find an investment opportunity, you can estimate the property tax rate based on a proposed sale price on the county's website, which can help you gauge the cost before you buy.

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There is a federal standard for landlording laws in a general sense, but many states and local municipalities will include additional laws that may differ from your local market's landlord-tenant laws. For example, some cities restrict vacation rentals, which may not be an issue in your local market. Speak with your local real estate agent, property manager, or other investors in the area to find out whether there are any notable laws that could impact your investment property.

It's not uncommon for professional teams in the area to take advantage of you not being nearby to check in. Contractors can take longer to do tasks -- or even say tasks are complete without actually doing them.

Using video services and cameras can be a great way to ensure contracts and obligations are being met. It's also a good idea to consistently communicate with your local management team to ensure the property is being managed properly.

There are many benefits to owning a rental property out of the area. However, there are also a lot of drawbacks that should be considered before buying. Some investors want to manage and oversee the property themselves, while others don't mind outsourcing tasks to benefit from some of the advantages out-of-area investments can offer. Ultimately, only you can choose whether it's the right move for you. I personally have owned dozens of properties out of state.

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