Out-of-State Real Estate Investing

Posted by Hannah Lapin on Feb 20, 2024 9:00:00 AM

Out of state real estate investing

 

In the world of real estate, there are numerous opportunities to build wealth for the savvy investor. One method you could employ is to buy a rental property in another state.

Out-of-state real estate investing has plenty of benefits, though it also comes with significant challenges. The following guide can help you decide whether or not it is worth considering a long-distance real estate investment strategy.

 

Why Consider Investing in a Property Out-of-State

There are many reasons to consider investing in out-of-state real estate properties. Common reasons include a more robust rental market, a chance to diversify your investments, appreciation trends, and combining business and pleasure with vacation rentals.

 

Higher ROI for Rental Properties

Rental properties in another state could result in better returns. There could be several reasons for this, including high prices in your local market, low transaction rates in your area, or an emerging market in another state. 

 

Portfolio Diversification

When all your real estate investment properties are in one market, there's an inherent risk if that market crashes or experiences a downturn. However, owning properties in other states diversifies the assets in your portfolio, protecting you from the risk of a market downturn affecting all your investments at once.

 

Appreciation

As a general rule of thumb, real estate properties increase in value with time. However, some markets may do so at a faster rate, making them a better long-term investment if you ever sell the property. If you identify a healthy real estate market in another state, it could be financially wise to take advantage of its high appreciation rates.

 

Using it as a Vacation Home

If you have out-of-state rental properties, particularly vacation rentals, and you choose to live in them as vacation homes for at least 14 days each year, you can claim a mortgage interest deduction on your taxes [1]. Additionally, many rental expenses can be deducted when tax season comes around.

 

Why Consider Investing in a Property Out-of-State

 Just as there are benefits to real estate investing strategies that include out-of-state properties, there are also some challenges. You will need to weigh the costs with the benefits to decide if owning a real estate property in another state is worth it.

Inexperience With the Local Market

Buying rental property in another state is risky because you are likely unfamiliar with the local real estate market. Even if you conduct a lot of research, you lack the intimate knowledge of what it is like to live in that area and what neighborhoods are desirable for properties.

 

Different Laws

The complexities of owning a rental property are numerous, and they get even more challenging when you cross state boundaries for your investment portfolio. There are unfamiliar real estate laws to contend with, different local laws regarding taxes, and permit or business license issues to sort out,

 

Networking

Developing a network of professionals in the industry is crucial for investors. You may need to connect with a real estate agent, contractors, property managers, other investors, and more to start investing the right way, and since you are out of state, it will be difficult to build this network.

 

Travel to the Rental Property

At some point, you will need to visit the property. You should see it before buying the property with a rental loan. Going forward, frequent visits will be necessary to check in with your property manager and ensure things are running smoothly. This will add travel time and expenses to your investment plan.

 

Property Management

Since you don't live in the state where your investment property is located, it's very hard to manage the unit effectively. You may need to hire a property manager to handle maintenance, finding tenants, lease agreements, and other details, which can add to your costs.

 

How to Buy Out-of-State Property

If you've looked at the pros and cons of real estate investing in another state and decided that it's worth the risks, then it's time to find the right rental property for your business. The following steps should serve as a guide to help you make the most informed decision.

 

Research the Market

Getting a good deal on an investment property requires knowledge of the local real estate market. 

You have to understand what the market is like for the type of property you're interested in—whether it's short-term residential, long-term residential, or even commercial—if there is a high demand for that type of rental property in the area, and what other properties will yours be competing with.

Working with a local real estate agent will be your best method of finding properties that fit your preferences and determining a fair price. You should also research the community of that market to see what types of amenities it offers and if it's a growing market.

 

Choose a Property

The perfect property can be hard to find, but if you know what to look for, the challenge becomes a little easier. For example, a property that will need a lot of repairs to get tenant-ready may not be worth the investment. 

Additionally, a poor location will make it hard to find quality tenants interested in renting the space. As a real estate investor, the research phase can be the most important determining factor in whether or not your out-of-state property will be profitable.

Consider a location type, property type, and structure that you're familiar with, as it can already be more challenging to manage an out-of-state property. For example, if you've only owned apartments so far, don't buy your first single-family home in another state.

 

Inspect the Property

You need to be on-site before you consider purchasing an out-of-state property. There are so many things that you can miss when you only look at pictures or videos of the interior and exterior. Seeing the property for yourself will be important to determine if it will meet your needs.

Also, make sure you pay for a professional property inspector to check the unit out. Their report will reveal any repair needs or future maintenance concerns so that you can get a better deal on the purchase. The inspection will consider elements like wiring, plumbing, roofing, siding, insulation, appliances, structural components, and more. 

 

Look for the Right People

Since you cannot directly oversee the rental property living in another state, you must partner with the right people to maintain the property and keep tenants happy. A good property manager or property management company can handle a good deal of the logistics.

Local contractors will be needed for upgrades and maintenance as well. A local real estate agent likely has these relationships, so you should rely on their knowledge to provide recommendations for local partnerships.

 

Secure Financing

Financing your rental property is going to be a key step in the process of long-distance real estate investing. There are several options you can leverage to fund your purchase of the investment property, including:

  • DSCR loanDebt-Service Coverage Ratio loans calculate the project rental income versus property debt instead of using the borrower's personal income for approval.
  • Commercial loanCommercial loans can be used for your rental business purchase. Available options include conventional commercial mortgages, small business loans, and hard money loans.
  • Refinancing – If you own a home or another investment property, you can refinance to fund the purchase or renovations of new out-of-state rental property.
  • HELOC – A home equity line of credit uses your current home's equity to borrow cash, which could be used to fund an out-of-state property purchase.

 

Close on the Property

Closing on the property will require additional costs. Depending on the state, it could be as much as 2-5% of the total cost of the property. Closing the property will include updating the title deed, transferring ownership, as well as paying fees, such as property taxes, attorney fees, realtor fees, transfer taxes, and more. 

 

Hire a Property Manager

Property management is a necessary service for out-of-state real estate investors. You need someone on location to maintain the property and take care of tenant needs. A property management company will handle lease agreements, tenant acquisition, vacancy marketing, maintenance requests, taxes, insurance, and all other logistical details that you cannot manage from another state.

 

Alternatives to Out-of-State Real Estate Investing

Diversifying your investment business strategy does not require you to purchase a property out of state. There are other ways to generate additional income from the real estate industry, including a real estate investment trust (REIT). 

A REIT functions much like a mutual fund where investors pay into the trust to become shareholders. The trust then builds a diverse portfolio of real estate investments that pay out regular dividends to shareholders, resulting in reliable passive income.

 

FAQs on Out-of-State Real Estate Investing

Does owning property out-of-state make you a resident?

Owning rental property in another state does not make you a resident. You would have to live in that state for at least half a year to be considered a statutory resident.

 

What states have the highest real estate ROI?

Some states have better returns for real estate investors than others. South Carolina, North Carolina, Idaho, and Florida are some of the best states for real estate investing for numerous reasons, including low property taxes, growing economies, hot vacation destinations, and fair housing prices [2].

Is out-of-state real estate investing risky?

Since you cannot directly oversee the rental property living in another state, you must partner with the right people to maintain the property and keep tenants happy. A good property manager or property management company can handle a good deal of the logistics.

Local contractors will be needed for upgrades and maintenance as well. A local real estate agent likely has these relationships, so you should rely on their knowledge to provide recommendations for local partnerships.


Resources: [1] 1040.com, [2] Management Library

Topics: Real Estate Investing

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