Instead of trying to choose the single best rental property in only one market, successful investors seek to minimize risk and maximize reward by holding one or two properties in the right out of state real estate markets.
1. Skipping due diligence and buying property sight unseenTo avoid one of the biggest mistakes that out of state rental property investors make, conduct in-depth research online and work with a local investor-savvy real estate agent and property management company to assist with your due diligence and property inspection.
While the demand for rental property may be strong in these places, rules and regulations that side with renters can end up limiting ROI and cash flow. Thoroughly research local laws and market customs by talking to property managers and joining local investor groups to learn what the real estate market is really like.
When most people start their real estate investing careers, buying rental property out of state is usually not at the top of their list of priorities. While adding an out of state rental property to your investment portfolio can be intimidating and carry unique risks, it can actually help to greatly strengthen your investing strategy and improve your overall return on investment (ROI).
There are several benefits to owning rental property out of state. First of all, when you invest in multiple geographic areas, you diversify your rental portfolio. When you own property in different regions, you are able to protect yourself from total devastation if a natural disaster affects one particular area. Likewise, all states, counties and towns have a unique economic system, which is susceptible to market ebbs and flows. If the market declines in one area, at least you also have homes in other markets, which may be doing better economically.
Another big benefit to owning an out of state rental property is that you can choose the specific type of return that you want, and then choose a market that is most likely to deliver your desired results. Are you looking for a property that yields the greatest monthly cash flow Do you prefer a higher projected appreciation Depending on your goals, you can identify the best states to invest in real estate, outside of your home market, that are best suited to your goals.
Additionally, if you live in a particularly expensive market, like San Francisco or New York City, it may not even make sense for you to own rental properties in your local area, as the ROI would be too low or even non-existent. However, buying a rental property in another state may allow you to get much higher returns.
While any real estate transaction carries risk, the risks associated with owning an out of state rental property are different than with other types of deals. Whether in the buying process or once you own the property, there are always risks involved, but there are also ways to mitigate those risks. Be on the lookout for the following risks, and understand ahead of time how to avoid them:
Your property is not what you expected: Buying investment property out of state sight-unseen is risky, no matter how much research you have done. If traveling to the actual property is out of the question, you should ask for exhaustive photos, and you should ask for photos of specific areas of the house, especially common problem areas. You may even want to see if the seller can send a video of a walkthrough to get a better idea of what you are buying. Getting these specifics from the seller, and then getting an independent inspection and appraisal, will help reduce the risks associated with buying a property you have never visited.
If you do choose to invest in out of state rental properties, doing your research and making calculated decisions can help ensure that you make sound investments. First and foremost, you will want to get pre-approved for financing, so that when you find the right deal you are ready to make an offer quickly.
Pick a vibrant market: When choosing a market to invest in, you should consider all the market elements, including population patterns, the local economy and rates of employment. You should look for increasing populations, a vibrant and lively local economy and low unemployment rates. With all these factors in place, you are more likely to experience a high ROI, all while reducing the risk of your out of state rental property sitting vacant for long periods of time.
Get pre-approved for financing: Securing financing outside of your home state may entail jumping through some additional hoops, which you may not be familiar with. Because of this, research financing options and get pre-approved before you start vetting properties. This will streamline the process once you find the right property, and help you avoid any unexpected surprises that delay or derail your purchase.
Find a good property manager: If you are planning on adding out of state rental property to your investment portfolio, you should know that managing a rental property out of state is a completely different ballgame than managing one that you can make regular visits to, and you absolutely must work with a reliable property management company. Interview prospective property managers, ask for references from other investors who have used them and research reviews online. Once you have your property management in place, you may want to ask for additional reporting on the condition of the property for the first couple of months, or even visit the property yourself to ensure that the property manager is living up to your expectations.
Whether you are investing in your first rental property, or you are adding to an established portfolio, buying rental property out of state can be a smart strategy. By choosing an area where you can get a higher return on your investment, you can grow and diversify your portfolio quickly, but you need to account for everything. Conducting thorough research, implementing strong property management that you trust, and always letting the numbers guide your decision making are a couple of the ways you can mitigate risks and ensure that your out of state rental property is a solid investment.
Even if you only jump into the market for a few years before you sell the property, you could walk away with a higher return on investment (ROI) than if you invested in an area with high costs and low growth.
Invest in areas with high rental demand and above-average appreciation to ensure you get the most out of your investment. Diversifying your real estate investments across multiple markets is a great way to manage your risk of loss and your chance of significant profits.
Cash return will also be a major driver behind your decision. Being able to generate cash flow from rental income means establishing an immediate value stream for your personal wealth. There could also be an up-and-coming market in another state that presents an opportunity too good to pass up. If you can buy in such an area before property values rise, your ROI will increase.
Investors who do everything right when buying and managing out-of-state properties still need to be aware of the tax implications. Failing to account for them could become troublesome during tax season, disrupting cash flow or creating unexpected expenses.
Another concern to worry about is double taxation. This can occur if you live in a state that has income tax and requires you to report in your home state. This tax is in addition to tax in the state where your investments reside. To offset this, you may be able to take a credit for state income tax paid in another state. However, the Tax Cuts and Jobs Act limits the deduction of state taxes to $10,000 on your federal income tax return.
Underwater on your investment When deciding on selling a property that will not turn around, many property owners take a loss to offset other income. The loss may qualify as an operating loss or capital loss carryover deductions of up to $3,000 per year. The state treatment of these losses could differ significantly or be restricted or lost depending on the state rules.
Even if you visited the real estate property yourself, hire a professional to look at the details of the home and tell you everything that's wrong with it. Blindly buying rental property can lead to financial headaches since you're responsible for the home's maintenance and repair costs.
When you buy a house out of state, you need someone to manage it. Unlike when you invest in your local area, you cannot get to the home 24/7 when something goes wrong. A property management company can help you handle the property and take the stress off you.
The right property manager will screen tenants, collect rent, and maintain the property, making the process of owning property out of state much easier. Like any other service, ensure you screen any property manager you consider using for your rental property.
If you find a healthy real estate market with lower housing prices, taxes, and overall costs, you might have a higher return on your investment. Pay close attention to the population rates, employment growth, and demand for rental properties to increase your ROI.
When you own rental properties, you're responsible for the maintenance. This includes 2 AM phone calls for leaking pipes or other disasters. You can't be the one to do the maintenance if you invested in an out-of-state property. However, a property manager can handle it for you.
Each state has different real estate laws. So when you're wondering, \"should I buy an investment property out of state\" only do so if you can afford to hire a real estate attorney to help you understand the laws in the area.
Long-distance real estate investing puts you at a much higher risk of scams and untrustworthy agents. Since you aren't there to see the property, you 100% rely on strangers to tell you the truth about the property.
When looking for the best states for rental property investments, you should look for states with a history of appreciating values, affordable prices, population and employment growth, and high rental demand. 59ce067264