Investing in Out-of-State Property

Buying and owning property is rarely easy or simple. When the property in question is in a distant location, the challenges multiply. Nevertheless, investing in out-of-state property might seem appealing if you live in an area where real estate is expensive. It might also be attractive if you already own your home but want to diversify your investments. You may just want to own a vacation home. Or your motives might combine all of these reasons and more.

Key Takeaways

  • Buy in a town you know, or get to know the town before you buy.
  • Finding a property management company and a maintenance worker are as important as finding a real estate agent.
  • Don't just tour the property. Get an inspection.

Regardless, here are the issues to consider before you make an offer.


Investing In Out-Of-State Property

Reasons to Buy

If you live in a place where prices are sky-high, such as San Francisco or New York City, local real estate investing or even local homeownership might be out of the question. You want to look at areas where the market fundamentals are sound but property costs are significantly lower.

On the other hand, if you live in an area with depressed or falling real estate prices, you may prefer to rent a home and invest in real estate elsewhere.

ROI Is the Key

In either case, you may find that the return on investment (ROI) is better elsewhere than it is at home. That is a big reason why many buy outside the region where they live. Purchase price, appreciation rates, mortgage expenses, taxes, housing regulations, rental market conditions, and more factors might be more favorable in another state and will contribute to a property's potential ROI.

Challenges to Consider

You won't have the same intimate, day-to-day knowledge of a distant market that you have of the market in which you live. You don't have an in-depth understanding of the best neighborhoodsor the worst. You will have to rely on research, word of mouth, gut instinct and the opinions of any professionals you hire.

Understanding the laws and regulations regarding property ownership and property taxes in your target area is another challenge. Even if you read every line of the local codes and ordinances, what it says on paper and what happens in the real world don't always match. Talk with property owners in the area to get a true understanding of local challenges.

Networking Out-of-State

You'll need good contacts in the area to make your investment plan successful. That doesn't only mean a real estate agent. You may need a property manager, a maintenance worker, and a contractor before long.

The secret to many out-of-state investors' success is finding and hiring an excellent property management company. It will be their job to fill vacancies, collect rent, make repairs and handle emergencies.

If you lived in the area, you might choose to manage the property yourself. If you live far away, professional property management is an extra expense you simply must incur to safeguard your investment.

Experienced builder and property manager Rusty Meador notes, "No matter how good of a real estate deal you find, it is only as good as its ability to be managed well."

The Complications

Even with a property management company on your payroll, you'll still need to make an occasional visit to your property to make sure that what managers and tenants tell you matches reality. This is an additional time and money cost that must be considered.

Also, when purchasing a rental property, especially rental property out-of-state, you're likely to encounter higher homeowners insurance rates, higher mortgage interest rates, and higher down payment requirements. Lenders consider rentals riskier than owner-occupant mortgages.

You'll also complicate your tax situation by owning rental property and earning income in more than one state. You may need to hire an income tax professional to keep you in the good graces of the tax authorities.

How Far to Go

After considering all of these factors, you may find that being an owner-occupant or purchasing investment property close to home is a much simpler and less expensive proposition.

In fact, think that through. Even San Francisco and New York City are within a couple of hours of less expensive real estate, and even places where prices are depressed have solid neighborhoods fairly close by.

Before You Buy Out of State

If you're still intent on buying out-of-state, be sure to heed these additional warnings. Do not buy sight unseen. Online information on a property can be out-of-date or incomplete. A local real estate agent or property owner might lie to close a sale.

If you unwittingly become the owner of a nuisance property that violates health and safety laws, you can be on the hook for code violations that are time-consuming and expensive to fix. If a property has been vacant for long enough, it can develop maintenance issues that can be solved only with a bulldozer, and you might be on the hook for the demolition bill.

Get an Inspection

Make sure you see the property in person and hire a professional to make an inspection.

Finding quality tenants is particularly important for absentee landlords. You won't be there to keep a close eye on your tenants' behavior or their treatment of the property, or to pressure them to pay if the rent is past due. In addition to hiring a top-notch property management company, you want to have tenants that won't cause you or your management company headaches.

Get Pre-Approved

While you're visiting, take the time to meet with various lenders and research the various mortgage types and interest rates available locally. It is best to get pre-approved for a mortgage, as this will cut down on the time it will take to close the deal once you've found your dream out-of-state home.

Finally, if you've never owned property, buying your first property out-of-state is extra risky. No matter how many books you read on property ownership, there is no substitute for experience.

How to Make it Work

If you are going to buy out-of-state, consider buying in an area you are familiar with, perhaps your college town or your hometown. It helps to have some knowledge of the area.

You'll need a network of local professionals to help you manage your property.

As a bonus, if you buy in an area that you visit anyway, your leisure travel can become at least partly tax-deductible because you will be adding a business component to those trips to check up on your property.

Dos and Don'ts

Buy in an area with some similarities to the area where you live, such as climate, demographics, or property age so that you have some idea of what you're dealing with. If you have lived in a 1960s suburb of California your entire life, don't buy a Victorian in Boston.

Don't buy a high-risk property. Buy in a primarily owner-occupied neighborhood to attract tenants who are a lower economic risk, says Ryan L. Hinricher, a founding partner of the investment home sales company Investor Nation. A high-quality property will typically have less maintenance and upkeep, he notes. "These properties also rent more quickly, as they usually have modern layouts and an adequate count of bedrooms and bathrooms."

Finally, as mentioned earlier, it's crucial to build a great network of professionals to help you and to occasionally visit your property yourself.

Out-of-State Alternatives

There are other ways to invest in real estate elsewhere. One option is a real estate investment trust (REIT) or a REIT exchange-traded fund (ETF). This is similar to investing in a stock and you can choose a REIT with a risk/return profile that fits what you're looking for.

Just as a stock owner doesn't have to make decisions about running the company, when you own shares of a REIT you won't have any of the headaches that are associated with actually owning property.

Article Sources
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  1. Internal Revenue Service. "Publication 527: Residential Rental Property (Including Rental of Vacation Homes)."

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