Investing in real estate out of state can be one of the best ways to diversify your investments. Even if you have a great local real estate market, spreading your money into different markets can help you maximize your profits and decrease the risk of a total loss should one market fail.
Reasons to Consider Investing in Real Estate Out of State
Investing in real estate is a big decision, and investing out of state requires even more consideration. Not only is distance an issue, but there are many factors you may not be familiar with when investing out of state.
However, there are many reasons to consider it, including the following.
Diversification
Diversifying your investment in different markets reduces the risk of a total loss.
For example, suppose you invested in the Chicago real estate market and also in the Nashville market. In that case, you don’t have to worry as much if the Chicago market declines or if the Nashville market remains steady or improves.
The key is to spread your money across multiple markets to reduce the risk of a major loss should the real estate industry suffer.
Access to better markets and local tax benefits
No two real estate markets are the same. If you live in an area where the real estate market doesn’t perform well or there aren’t many opportunities for investing, you may find more opportunities in markets in other states.
Some areas may also have local tax benefits to encourage more real estate purchases. Looking at different markets and their tax benefits can help determine where you’ll benefit the most.
Technology makes long-distance investing easier
Today, it’s easier than ever to manage a property from afar. Not only can you hire a property management company, but today’s technology makes it easy to handle landlord tasks, including collecting rent, connecting with tenants, and handling property management.
Hiring a property management company will decrease your profits, but can take the burden of managing the property off your shoulders. You know you have a trustworthy individual overseeing the property and handling maintenance and repairs.
Risks Involved in Investing in Real Estate Out of State
Any real estate investment has risks, but investing in real estate out of state has some risks you wouldn’t consider if you stayed close to home. Here’s what to consider.
Long-distance management challenges
We touched on property management and how it works when investing out of state, but this can be a downside. Not only must you pay for a property management company, but you need to be able to trust them. Like any company, there are property management companies that aren’t as legitimate as others and can leave you with more problems.
Researching and ensuring a company is legitimate and has good reviews is essential before trusting them with your property management needs. While it won’t prevent every bad thing from happening, it can decrease the risk.
Relying on other professionals
Since you don’t live in the market where you want to invest, you must rely on many professionals to do your tasks. This includes real estate agents, contractors, and property management companies. Find professionals you can trust and who will take you down the path that leads to profits rather than problems.
Limited market knowledge
You likely don’t know the market well, since you don’t live in the area. This ties into relying on professionals, like a real estate agent, to help you choose the right property.
However, not knowing about the area puts you at risk and requires that you work with an investor-friendly agent who understands the rental market, not just buying and selling property.
If you buy in an area that isn’t popular for renters, you may find more vacancies than you anticipated.
Legal differences
Each locale has different laws and regulations. Not knowing them can put you at a disadvantage. Working with a real estate lawyer can help you get familiar with the area’s laws, but you may discover that they limit your profits or what you can do with the property.
Tenant risks
Not seeing tenants in person puts a different spin on the relationship. There’s less of a personal relationship, which can make some tenants more likely to bail on their lease or not pay their rent on time. The key is proper tenant screening to ensure you don’t take too many risks.
Inspection challenges
Viewing a property online is a great way to determine if it’s a good purchase, but it doesn’t compare to a physical inspection. Not knowing what the property looks like in person or its issues can be a problem later.
While you can hire a professional inspector to write a report, it’s not the same as seeing it yourself to get a feel for what potential tenants may want.
The Process of Investing in Real Estate Out of State
Investing in real estate out of state requires a few more steps than if you invested in your local market. Here are the steps to take.
Out-of-state research and planning
Research and planning are essential to a successful real estate investment. Just as you’d research an area in your local market, you should do the same when investing out of state, but to an even greater extent.
Think long term and talk to professionals who know the area and understand how it has worked. While past performance doesn’t indicate what might happen in the future, it’s a good way to determine the path the area is taking to consider if it’s a good long-term investment.
Building a local support team
Investing out of state requires you to lean on many professionals. Before purchasing a property, assemble your team of professionals to ensure you have the right support. A few key players are the real estate agent, real estate attorney, contractors, and property management company.
You may also want to assemble a team of professionals to renovate or repair the property as needed. For example, having an electrician, plumber, and HVAC professional on your team ensures someone trustworthy is helping your tenants if things go wrong.
Financial preparation
Buying a property requires extensive capital, of course, but there are other costs to consider when purchasing out of state. You should factor in additional travel expenses to go back and forth when visiting the property before or after buying it.
You’ll also pay for property inspections and property management. The fees for property management will likely be higher than your local market because you’ll rely on property management for almost all tasks, not just overseeing the property.
Due diligence and property inspection
Even if you have a great team of professionals, ensure you do your due diligence. Research the area, the house itself, and the local rental market. Work with a professional inspector to determine the property’s condition and what work it requires. Plan accordingly for anything the inspector finds that could go wrong soon, like if the roof has only a few years left on it or the HVAC system needs repairs.
As the landlord, you must maintain the property and take care of repairs immediately, so knowing what’s wrong with it or what normally goes wrong in the area is important.
Purchase the property
After doing the legwork and establishing how you’ll pay for the property, you can move forward with the closing. If you’re leveraging your investment with a mortgage, you’ll sign the mortgage documentation, and the seller will receive the funds.
Whether you have tenants or not, you’ll be responsible for the mortgage payments, so it’s in your best interest to find tenants as quickly as possible.
Establishing effective property management
When investing in out-of-state real estate, finding a property management company before closing on the property is important. Because you aren’t there to see the property yourself, you need eyes and ears on the property from the start.
Tips for Successfully Investing in Real Estate Out of State
Investing in real estate out of state can be a great way to earn more profits. To make sure it’s successful, try these tips:
- Do extensive research.
- Leverage local expertise.
- Visit the property in person, if possible.
- Find a quality property management company.
- Talk to other investors in the area.
- Network as much as possible to ensure you have a quality support team.
Final Thoughts
Investing in real estate out of state takes a lot more considerations than investing locally. It can be a great way to reach your financial goals and build a greater real estate portfolio when you have the right team on your side.
Do your research before looking at homes to see what type of support you’d have in the area and what the local renter’s market is like. When you find an area you want to invest in, be sure you can visit at least occasionally to see that your investment is in good standing.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
