Key Takeaways
Out-of-state real estate investing can provide access to more affordable markets, stronger cash flow, and greater portfolio diversification.
Choosing the right market requires researching local economic trends, rental demand, population growth, and landlord-friendly regulations.
Building a reliable local team, including a property manager, real estate agent, inspector, and contractors, is essential for long-distance success.
Thorough due diligence helps reduce the risks associated with buying and managing a property from another state.
Financing requirements for out-of-state investments may differ, making it important to understand lender expectations before purchasing.
Technology makes it easier to evaluate, purchase, and manage out-of-state rental properties from anywhere.
Thanks to the power and ubiquity of the internet, real estate investors today are no longer limited by geographical constraints. Through online listings, virtual tours, and professional property management services, an investor can buy and own profitable property investments in cities and regions hundreds or thousands of miles away from where they live.
For such investors, these out-of-state investments often mean access to more affordable markets with stronger rental demand and superior returns than are available locally. However, buying an out-of-state property requires careful research and planning, with a good grasp of the unique challenges that come with owning property from a distance.
SGI Property Management Phoenix is your trusted partner for everything rental property owners need, from tenant screening and rent collection, to marketing and financial reporting.
Should You Invest in an Out-Of-State Property?
Not every property investor should or can invest in out-of-state properties.
That’s because distance magnifies the risk inherent in owning an income property. With an out-of-state property, investors do not have the luxury of being able to visit their investment property in person or interact directly with the tenants.
This can result in serious complications. But for real estate investors who find a way to overcome these difficulties, they can enjoy benefits like:
1. Access to More Affordable Markets
Properties in other states often carry a lower price tag than those in an investor’s home state. Smart investors who invest in such markets position themselves to earn huge returns when property prices in these locations eventually go up. Also, lower-priced markets sometimes offer opportunities for investors priced out of their local markets.
2. Superior Yields
Investment properties in distant markets can offer stronger cash flow (relative to their purchase price) than properties in coastal areas and major metropolitan centers. By identifying locations with favorable rent-to-price ratios, investors may enjoy higher rates of return while accelerating the growth of their investment property portfolio.
3. Portfolio Diversification
For investors looking to protect their assets from economic downturns, localized natural disasters, and the spillover effects of these events on property prices, out-of-state properties offer a viable alternative. Properties in one region can continue to yield good returns as housing demand plummets in other locations.
4. Access to Growing Markets
Many out-of-state investors target cities experiencing rapid population growth, infrastructure development, and massive job creation with rising incomes.
These locations often experience increased demand for housing with lower property values and higher yields. These types of investments lead to substantial gains in the long-run.
How to Invest in Out-Of-State Properties
Choosing the Right Market
A big part of investing in out-of-state properties is identifying the right market before the information becomes common knowledge. This process involves studying different regions to evaluate and understand their economic fundamentals. It sometimes requires a visit to the city to gain firsthand insights into the economic realities of the location.
Key indicators that investors should focus on when checking out potential locations for out-of-state property investments include: rapid population growth, expanding job market, accelerating industrialization with economic diversification, rising wages, growing rental demand, landlord-friendly laws, low crime rate, quality schools, etc.
Not all cities exhibiting these characteristics are suitable for investing in out-of-state properties. Regions that are dependent on a single major employer or industry are not always a good option for such investments. That’s because their lack of economic diversification makes them highly susceptible to economic upheavals.
Building a Local Team
To succeed with an out-of-state investment property, you need “boots on the ground.” That is a team of trustworthy and competent agents and experts who act as your eyes, ears, and go-to problem solvers in the property.
Without them, it is literally impossible to successfully purchase and manage an out-of-state rental property. Your team should include:
An experienced estate agent: The right estate agent is one who actively invests in real estate themselves and understands the key metrics for assessing the potential of an income property. This kind of expert is invaluable for helping you identify the best neighborhoods, find the right property, and negotiate favorable terms.
A reputable property manager: The property manager (PM) is the most important person for the success of your property. As your primary representative on the ground, the PM oversees all aspects of rental operations, from marketing to tenant screening, rent collection, maintenance, tenant communications, and lease enforcement.
A licensed home inspector: A certified home inspector helps you avoid properties with hidden problems. They understand the chronic issues that homes in the location face, so they know what to look for when evaluating a property. Purchasing an out-of-state property without a home inspection can lead to disaster.
Contractors: A lineup of trusted plumbers, electricians, HVAC technicians, landscapers, roofing experts, general handymen, etc., is essential for handling ongoing maintenance and emergencies. Having a local team of these experts on speed dial ensures that you can make sound decisions about your property from a distance.
A real estate attorney: When buying an out-of-state property, an experienced property lawyer is indispensable for helping an investor navigate the often-complex landscape of local housing regulations. They provide legal guidance and educate you on specific landlord-tenant laws that can affect your rental operations.
Conducting Due Diligence
As already stated, distance magnifies risk when investing in real estate.
The only way to mitigate risk is with comprehensive and up-to-date information. Before investing in an out-of-state property, the following details must be thoroughly examined: the property's physical condition, its rental history, market data, local market trends, zoning regulations, costs, HOA rules, etc.
Financing the Property
Financing an out-of-state property is not so different from financing a property in your home state. But some lenders view out-of-state investment properties as riskier. This can impact borrowing costs and make the loan application process more difficult. Because distance impacts the property’s operational costs, lenders may impose steeper cash reserve requirements.
Deploying Technology
From evaluating a potential investment location to finding the right home in that location and managing the asset afterwards, technology plays a vital role in the purchase and management of an out-of-state property. A few of the areas where these tools come in handy in these situations include virtual tours, video conferencing, digital document signing, and property management.
Bottom Line
Investing in out-of-state rental property can be an effective way to expand your portfolio, improve cash flow, and take advantage of opportunities in growing markets. While managing an investment from a distance presents unique challenges, careful planning, thorough research, and the right local professionals can help minimize risk and maximize returns.
Success ultimately comes down to preparation. By choosing the right market, performing proper due diligence, leveraging technology, and partnering with an experienced property management team, you can confidently invest beyond your local area while protecting your investment for the long term.
