When it comes to real estate investing, there are few – if any – written rules about what’s right and what’s wrong. Experienced real estate investors and other experts keep repeating that location is the key to making a good investment. However, there are so many aspects of location: the country, the state, the city, the neighborhood, the street, the infrastructure, the level of development, the pace of development, the population, the labor market, the economic situation, economic trends in the area, etc.
One other very important aspect of the location which you are considering for your next real estate investment is the distance from your home, i.e., from you. Although it is not a must, most real estate investors tend to purchase rental properties close to their homes – maybe not necessarily in the same neighborhood or even city but at least in the same state. Nevertheless, out-of-state real estate investing is always an option. Below we will look at some of the most important advantages and disadvantages of out-of-state real estate investing that you should keep in mind when choosing where to buy an investment property.
Related: Real Estate Investing Beyond the 20 Mile Radius
Why Out-of-State Real Estate Investing Can Be a Good Idea
If you are thinking about out-of-state real estate investing, you must have a reason for that. One of the main advantages which out-of-state real estate investing can offer comparing to purchasing a property nearby is the actual market. If you live in New York City or San Francisco, it might just be unaffordable to buy a rental property there. Thus, it might be a very good idea to turn to other cities and states where current market prices are more reasonable and affordable.
2. Diversify Your Portfolio.
If you are already a real estate investor with a property in your own town or state, out-of-state real estate investing gives you the opportunity to diversify your investment portfolio. Investing in real estate is generally characterized by the high level of assets concentration simply because of the high value of every single property. So, if you will have more than one rental property, it is a good idea to have them in different locations. In this way, if the market in one state collapses, you will still have the property in the other state making money for you.
3. Vacation Home.
Depending on what kind of renting you are planning to do for your new investment property – traditional or Airbnb, buying a vacation home as out-of-state real estate investing could be perfect for you. Let’s say there is a place where you go every year for your annual vacation. Why not buy a second home there and rent it out during the time you are not there? This will save you money from renting a house when you go there for your vacation and will make money for you throughout the rest of the year.
Use our Airbnb calculator to estimate the short term rental income potential of any property in the US.
4. Better Market.
Overall prices – or affordability – are just one aspect of the real estate market. There are many other features which make one location better than another for investing in real estate. If you live in a stagnant market where home prices are stable or going down, where demand for rent is low and/or supply is high, where the economy is not doing too well, there are no major development plans, and the population is not growing, chances are your home location is not the best option for buying a rental property. Then, you should turn to out-of-state real estate investing in search for a more vibrant, growing, promising market.
Related: Best Cities For Airbnb Occupancy Rates
5. More Options.
Related to our last point, once you have decided to go out of your own location, your options are virtually unlimited. You could do some proper research or rely on your previous experience to find the perfect location for out-of-state real estate investing.
Related: Best Places to Invest in Real Estate: Going International
As we show above, there are many benefits which out-of-state real estate investing can bring you. Of course, there are also many challenges which investors – especially new ones – might encounter if they decide to purchase a rental property away from their home. Let’s look at the most significant ones.
Why Out-of-State Real Estate Investing Can Be a Bad Idea
1. Unfamiliarity with the Market.
The first major challenge which you will encounter with out-of-state real estate investing is the fact that you simply don’t know the market. Which are the best neighborhoods? What are the economic trends? How are the people there? These are all questions you won’t be able to answer yourself just from living in the place. Simply, you don’t have the same intimate knowledge of a distant market. However, there are a few things you can do to alleviate the problems:
- Consider a place you are somewhat familiar with: where you grew up, where you go for vacations, where you went to college, where you have friends and relatives (they will be an invaluable source of information about the place), etc.;
- Do some good (online) research: this is basically the same as buying in your own state. You still have to do your homework properly before choosing a rental property;
- Network: try to get in touch with a few local real estate investors and learn as much as much you can from their experiences.
One way to become familiar with the market is by searching the city on Mashvisor and using the heat map to find areas that best meet critical investing criteria. In addition, key calculations and comps are provided, which can help you understand the market and how existing rentals are performing.
2. Unfamiliarity with the Legal Regulations.
If you live in a place and own a home there, you are likely to be familiar with all the bank and legal procedures for purchasing and managing a house or apartment in that place. However, regulations vary vastly from one place to another, so you are most likely to be very unaware of the laws in case of out-of-state real estate investing. That’s manageable though. You just have to do proper research, check out governmental websites and other sources, talk to accountants and lawyers, and get in touch with local investors.
3. Distance when Choosing.
If you are choosing a property for out-of-state real estate investing, you will face the inconvenience of having to travel some distance to check out the properties you are considering. This will cost you time and money. However, under no circumstances buy a rental property before having seen it with your own eyes. Even if you have to travel from afar, it is always a good idea to check out a property several times – in different hours, on different days – before making the final decision. To save yourself some time and trouble, you can hire a real estate agent to do some of the work for you. You can also arrange for a professional inspection of the property before you visit. If the inspection shows too many problems, then maybe you don’t have to visit at all.
Related: How to Find a Real Estate Agent for Investment Properties
4. Travel during Regular Visits.
If you do an out-of-state real estate investing, you will have to travel every time you decide to visit your property or you need to fix anything. First of all, when buying a property far away from your home, it is a good idea to consider properties that are turnkey or nearly turnkey. In this way, you will save yourself the additional traveling and the trouble associated with the fact that you don’t know local constructors, plumbers, painters, etc. Another option which is nearly a must for out-of-state real estate investing is hiring a property manager – either an individual or a company – to take care of your investment property. This will save you a lot of time and stress – and potentially even money – compared to the situation in which you have to travel several hundred (or thousand) miles every time a pipe breaks.
Related: Professional Property Management: Pros and Cons
If you are looking for a rental property and your local market does not seem to offer the perfect solution, don’t be scared to look out of state. After all, whether you are buying in your own local market or a few states away, the basic principles on which you should base your investment decision are generally the same. Just as with other forms of investing, real estate investing is never risk-free and definitely highly profitable; there is no guarantee regardless of whether you invest in your own town or out of state. Thus, just do your homework properly and if you find the right property, don’t hesitate to go for out-of-state real estate investing.