When it comes to real estate investing, buying rental property out of state might not be the first thing that comes to mind. However, adding an out of state rental property to your investment portfolio can actually strengthen your strategy and improve your overall return on investment (ROI). In this article, we will explore the benefits and risks of buying rental property out of state, and provide you with some practical tips for success.
Why Purchase Out Of State Rental Property?
Diversifying your rental portfolio is one of the key benefits of owning rental property out of state. By investing in multiple geographic areas, you protect yourself from total devastation if a natural disaster affects one particular area. Additionally, each state, county, and town has a unique economic system, which is susceptible to market fluctuations. If the market declines in one area, having properties in other markets can help offset potential losses.
Another advantage of owning an out of state rental property is that you can choose the specific type of return you want and find a market that aligns with your goals. Whether you're looking for the greatest monthly cash flow or higher projected appreciation, investing in real estate outside your home market allows you to select states that best suit your objectives.
Moreover, if you reside in an expensive market like San Francisco or New York City, owning rental properties locally may not yield a satisfactory ROI. However, buying a rental property in another state can potentially generate much higher returns.
Risks Of Buying Rental Property Out Of State
While all real estate transactions involve risks, owning an out of state rental property presents unique challenges. From the buying process to property management, it's important to be aware of these risks and take steps to mitigate them. Here are some key risks to consider:
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Your property is not what you expected: Purchasing investment property out of state without seeing it in person is risky. To minimize this risk, request comprehensive photos of the property, including specific areas of concern. If possible, ask the seller for a video walkthrough. Additionally, hire an independent inspector and appraiser to assess the property before finalizing the purchase.
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Finding quality tenants can be challenging: Finding reliable tenants who will take care of your property is crucial. This task becomes even more challenging when your rental property is in another state. Hiring a competent property manager can help you avoid potential tenant issues. A good property manager will handle tenant placement, rent collection, and property maintenance. Regularly checking in on the property will ensure your expectations are being met.
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Lack of a support team: When buying rental property in another state, you may find yourself feeling less in control when things go wrong. It's important to have a trusted support team in place, including a lawyer, contractor, and tax professional. Building relationships with local investor groups can provide valuable recommendations for reliable professionals.
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Maintenance considerations: With an out of state rental property, it's easier to forget about regular maintenance tasks. Your property manager can help with this, but setting calendar reminders to check on maintenance is essential. Preventing small issues from becoming major problems will save you time and money in the long run.
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Unfamiliar local laws: Each state has its own unique rental laws and regulations. When renting out property in another state, it's important to familiarize yourself with the local laws. Consider consulting with a local lawyer to ensure you comply with all legal requirements.
Tips For Owning Rental Property In Another State
If you decide to invest in out of state rental properties, conducting thorough research and making informed decisions is crucial. Here are some tips to help you succeed:
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Get pre-approved for financing: Before you start searching for properties, get pre-approved for financing. This will give you a clear idea of your budget and allow you to make offers quickly when you find the right property.
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Pick a vibrant market: Choose a market with increasing populations, a robust local economy, and low unemployment rates. These factors contribute to higher ROI and reduce the risk of your rental property sitting vacant for extended periods.
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Do your research: Research the property and the seller extensively. Evaluate the neighborhood, crime statistics, comparable rent prices, and seek the help of an inspector and appraiser. Research the seller's history and reputation to ensure a trustworthy transaction.
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Run the numbers: Use rental property income calculators or spreadsheets to analyze the potential income and expenses of the property. Be realistic with your estimates and consider lower expected rents and higher expenses to account for unexpected costs.
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Find a good property manager: Managing an out of state rental property requires a reliable property management company. Interview potential property managers, ask for references, and research their reviews. Regularly communicate with your property manager and consider visiting the property yourself to ensure expectations are met.
Finding Out Of State Rental Properties
The internet is a valuable tool for finding out of state rental properties. Real estate listing websites like Zillow and Trulia offer search parameters for your preferred market. Take advantage of the wealth of housing data available online, such as crime statistics and local economic information. Another option is to use platforms like Roofstock, specifically designed for real estate investors, to review annual returns, cap rates, and more.
If you have connections with real estate agents, search the MLS (Multiple Listing Service) for detailed and up-to-date market information. Local agents can provide valuable insights into the rental market. Additionally, reach out to other investors in your network for recommendations and advice on the market's performance.
In summary, buying rental property out of state can be a smart strategy for real estate investors. By conducting thorough research, working with a reliable property management team, and relying on solid financial calculations, you can mitigate risks and ensure a successful investment. Ready to capitalize on the opportunities in today's real estate market? Click the banner below to enroll in a free online training class and get started on your real estate investment journey!