What You Need to Know About Out of State Real Estate Investing
September 14, 2022
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If investing in real estate properties in your area is out of the question, you might consider out-of-state real estate investing. No laws or regulations state that you must stay in your local real estate market. If you have the means, you can invest in real estate markets throughout the country.
Why Invest in Real Estate Out of State
Every real estate investor has different reasons for long distance real estate investing, but here are some common reasons.
- The local real estate market is too saturated
- Rental properties in your local market are too expensive
- You might have a higher revenue stream investing in lower-cost properties
- You can take advantage of undervalued markets with population and job growth potential
- You can take advantage of the diversification of your real estate portfolio
Before Long Distance Real Estate Investing
Taking advantage of buying an out of state rental property sounds great, but take these critical steps before you do.
Find a Realtor
Finding the best real estate agent is the key to being successful at out-of-state real estate investing. In your local market, you might get away with finding properties yourself and saving the cost of commission sellers add to the sales price.
However, in an area you aren't familiar with and aren't in regularly, you need the expertise of a real estate agent that knows the market well.
Work with an agent experienced with real estate investors who can point you in the right direction to homes that are attractive to quality tenants and will create good revenue.
An inspection is a critical component of buying property out of state. Do your research and find a property inspector with great reviews and experience inspecting investment properties.
Even if you visited the real estate property yourself, hire a professional to look at the details of the home and tell you everything that's wrong with it. Blindly buying rental property can lead to financial headaches since you're responsible for the home's maintenance and repair costs.
You should first get pre-approved for a mortgage, just like when buying a home for you and your family.
Knowing how much you can borrow before looking at homes will help you look in the right real estate markets. It also opens more doors since most real estate agents won't waste their time showing you a home if you can't prove you qualify for financing.
Because you're investing in rental properties, you'll need a large down payment, but most lenders let you get by with 20% - 30% down and borrow the rest.
Hire a Property Manager
When you buy a house out of state, you need someone to manage it. Unlike when you invest in your local area, you cannot get to the home 24/7 when something goes wrong. A property management company can help you handle the property and take the stress off you.
The right property manager will screen tenants, collect rent, and maintain the property, making the process of owning property out of state much easier. Like any other service, ensure you screen any property manager you consider using for your rental property.
Pros and Cons of Real Estate Investing Out of State
Every investment has pros and cons, including long distance real estate investing. Here are the investing in real estate pros and cons you should understand.
Benefits of Real Estate Investing Out of State
If you find a healthy real estate market with lower housing prices, taxes, and overall costs, you might have a higher return on your investment. Pay close attention to the population rates, employment growth, and demand for rental properties to increase your ROI.
You should diversify any investment. It reduces the risk of total loss. If you invest all your money in one real estate market and that real estate market crashes, you could lose everything.
Look around now, and you'll notice some areas of the country's housing markets are falling while others are still booming. Diversify your investment, and you'll offset significant losses.
Every area of the country appreciates at different rates. So, for example, an area that's maxed out in population and employment growth won't appreciate as much as an area that's still growing.
Before investing, conduct your research and work with an experienced real estate agent to find the best states for rental property.
Can Serve as A Vacation Home
What's not to love about being able to use your rental property as a vacation home? Check with your tax advisor before doing this, so you don't lose the tax benefits of being a real estate investor.
Challenges of Real Estate Investing Out of State
When you own rental properties, you're responsible for the maintenance. This includes 2 AM phone calls for leaking pipes or other disasters. You can't be the one to do the maintenance if you invested in an out-of-state property. However, a property manager can handle it for you.
Unfamiliar Real Estate Laws
Each state has different real estate laws. So when you're wondering, "should I buy an investment property out of state?" only do so if you can afford to hire a real estate attorney to help you understand the laws in the area.
Not understanding the local real estate market might leave you with a lower ROI than anticipated. For example, if the local laws favor tenants, you might not make as much as you hoped or be on the hook for more expenses than you realized.
If you don't visit the home, you might underestimate the cost of renovating a rental property to make it suitable for tenants. It's also possible that the inspector you hire isn't as good as his reviews said.
If he misses issues the home has, you might be on the hook for more maintenance and repair costs than you thought.
Scams and Untrustworthy Agents
Long-distance real estate investing puts you at a much higher risk of scams and untrustworthy agents. Since you aren't there to see the property, you 100% rely on strangers to tell you the truth about the property.
Always get a second opinion before jumping in head first to ensure a rental property is as good as the first agent made it sound.
Best States for Rental Property Investments
When looking for the best states for rental property investments, you should look for states with a history of appreciating values, affordable prices, population and employment growth, and high rental demand.
Currently, the top states for investing in real estate properties include Florida, Arkansas, California, Georgia, and Idaho. Of course, each state has good and bad parts, so always research to determine the potential ROI in any area before owning rental property.
Buying Property Out of State Tips and Tricks
Before buying rental property out of state, here are some tips and tricks to consider.
- Create a business strategy - Investing in rental properties out of state takes much more effort and risk. Having a strategy and mission in mind can keep you on track, allowing you to assess opportunities fairly and avoid making rash decisions.
- Look for areas with high employment growth - When employment rates increase because a new large company is moving there or a specific industry is booming, rental demand increases, giving real estate investors more opportunities.
- Stick with areas you know - Even though you're buying rental property out of state, you can buy in areas you know well. Maybe you grew up in the area, went to college there, or have a favorite vacation spot; any familiarity with an area can help you make smart investing decisions.
Investing In Real Estate Out of State FAQ
Check out some common frequently asked questions about investing and buying out of state property.
What Should I Look for When Investing Out of State?
Before buying a rental property out of state:
- Do your research
- Look at the area's rental demand, average home price, average rent prices, population growth, and employment rates
- Stick to areas with lower costs and higher growth to increase your chances of a positive return
Can I Live In My Investment Property?
You can live in your investment property, but it might affect your tax liabilities. When you invest in real estate as a business, you have access to more tax deductions than if you did it as a hobby.
However, there are strict tax laws regarding living in your investment property, so check with your tax advisor before deciding.
Is Renting a Good Investment?
Like any investment, there are risks in investing in real properties. However, diversifying your investments, doing your research, and securing assistance from reputable real estate professionals such as attorneys, real estate agents, and property managers can help increase the chances of the investment's success.
If You Own Property in Another State, Are You a Resident?
Owning rental property out of state doesn't make you a resident. Your state of residency is the state you live in most of the year. It's where you receive your mail and register to vote.
Out of State Real Estate Investing: The Bottom Line
Out-of-state real estate investing is a great way to diversify your investment portfolio. Long distance real estate investing can be a great option if you live in an area that's too expensive to invest in or you want to access other real estate markets.
However, before you do, ensure you have the right real estate agent, attorney, and property manager to help make your investment as successful as possible. Learn more by signing up and visiting our blog.
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