Are you thinking of owning rental property this 2018? Well, you’d be happy to hear that this is one of the best investment strategies to make money and create wealth. However, a lot of thinking has to be put into this, and a lot of decisions have to be made. And by that, we mean a LOT!
What type of investment property to buy, which investment property financing option is best, which rental strategy to follow, and how much to charge for rent? These are just some of the most important questions that every real estate investor should answer before owning rental property.
In this article, we’re focusing on another question of equal importance and that is: Should you buy an investment property in your local real estate market or out-of-state? It’s crucial for property investors to answer this question before owning rental property simply because location affects almost every aspect of investment properties that determines their success.
In real estate investing, different locations yield different return on investment. In addition, there are specific features that make certain locations profitable for owning rental property and others not. Thus, if your local real estate market lacks these features, then it’s not a good place to start real estate investing, and you should probably consider looking into out-of-state investment properties.
Below, we ask property investors 5 questions answering which will help them determine when they should invest in their local real estate market and when they should consider out-of-state real estate investing.
Is Your Local Housing Market a Buyer’s Market?
Before owning rental property, you first have to buy one – obviously! However, before you go ahead and buy your first investment property, you need to ensure that you’re in a real estate buyers’ market. In a real estate buyer’s market, the supply of homes for sale is more than the buyers in that real estate market. In other words, the supply of homes for sales is higher than the demand for real estate properties. A real estate seller’s market, on the other hand, is when the supply of homes is less than buyers (demand is higher than supply).
This means that property investors are able to find better, more affordable, and more profitable investment opportunities in a buyer’s market than a seller’s market. Thus, before owning rental property in your local real estate market, conduct a real estate market analysis to determine whether it’s a buyer’s or a seller’s market. If the results reveal that you live in a seller’s market, out-of-state real estate investing will be a smart investment decision.
Is Your Local Housing Market Affordable?
When you’re a beginner real estate investor buying your first investment property, the first thing that you consider is property prices in the real estate market. If you live in a real estate market where investment properties are overpriced or are just not fordable for you, then buying an owning rental property would be a bad investment decision.
In such real estate markets, property investors have to make an unrealistically high rental income to make up for the high investment property prices. Otherwise, they won’t be able to get a good cash on cash return or a good cap rate. Thus, if you’re thinking of owning rental property, but your local real estate market is overpriced or not affordable (such as San Francisco, for example), you simply have to turn to out-of-state real estate investing. Focus on performing a real estate market analysis to find an out-of-state buyer’s market where rental properties are more affordable.
Does Your Local Housing Market Offer Profitable Investment Properties for Sale?
The goal of any real estate investor is to make money and profits from his/her investment. As mentioned earlier, location influences many aspects of real estate investing – this includes the profitability of rental properties. In some locations, property investors can find investment properties with a return on investment, cash on cash return, cap rate, and rental income higher than in other locations. These locations are the best for owning rental property!
Many factors determine the profitability of rental properties in different locations including supply and demand, growing population, strong job market, and a healthy economy. Before owning rental property in your local real estate market, take a look and decide whether or not these factors are seen. If not, then as a real estate investor, you will have a hard time finding profitable investment properties.
A real estate market analysis will also show property investors whether their local real estate markets offer any profitable investment properties for sale right now. If this is not the case, turning to out-of-state real estate investing for owning rental property would be a better investment decision. An out-of-state market might offer more profitable rental properties in terms of return on investment, rental income, cap rate, and cash on cash return than investment properties within your local market.
Does Your Local Housing Market Align with Your Rental Strategy?
One of the decisions property investors have to make is how they’ll rent out their investment properties – traditional or Airbnb. If you have a preference for your rental strategy, then you should look for a location that aligns with it. Some real estate markets yield a higher return on investment for traditional rentals than for Airbnb rentals (and vice-versa).
For example, if you favor traditional rentals but live in a real estate market where Airbnb rentals are more profitable, then it’s best to consider out-of-state real estate investing. Otherwise, you’ll face serious problems like high vacancy rates, negative cash flow, and losing instead of making money from owning rental property.
Can You Afford Professional Property Management?
The last question to answer isn’t related to your local real estate market, but to your financial abilities as a real estate investor instead. The main disadvantage of out-of-state real estate investing is property management. When property investors live thousands of miles away from their rental properties, attending to all of the tenants’ needs becomes hard (if not impossible). Landlords will have to spend a lot of time and money to regularly visit and maintain the investment property.
Click here to read more about the challenges of owning rental property and the best ways to overcome them!
If you don’t want to go through this hassle when owning rental property out-of-state, your other option is to use the services of professional property management – which are not cheap. Thus, if you’re a beginner real estate investor and can’t afford that, then investing in your local real estate market is a better investment decision. However, if you are an experienced real estate investor with multiple rental properties, you can still consider owning rental property out-of-state and hiring a professional property management company to take care of your investment property for you.
Owning Rental Property – Conclusion
Location is an important aspect of real estate investing that determines your success when owning rental property. Therefore, it’s crucial for property investors to decide whether to invest in their local real estate markets or out-of-state. There is no right or wrong answer to this question – it depends on your particular situation. If owning rental property in your local real estate market doesn’t yield the returns you wish for, don’t let this stop you from becoming a real estate investor. Instead, consider out-of-state real estate investing.