Building a real estate portfolio that includes out-of-state properties may sound intimidating. But there are many practical benefits to doing so. And with today’s creative real estate investment alternatives, it’s easier than you think!
In this article, we’ll explain:
The benefits of investing in out-of-state rental property,
How to invest in property out-of-state,
What to watch out for when investing in out-of-state property,
5 Big Benefits of Investing in Out-of-State Property
Before we talk about how to invest in property out-of-state, we need to address the why. Why would you want to purchase an out-of-state rental property that you can’t keep an eye on?
Here are five great reasons to invest in a rental property out-of-state.
1. You can geographically diversify your investment portfolio.
Investing in multiple properties in a small local market can be risky. If a major regional employer closes or relocates, the entire micro-economy of that area can suffer. People may leave town in search of other opportunities, leading to lower demand for local housing and declining rental rates.
If all your properties are located in one geographic area, a local recession could be a disaster. But if you diversify your portfolio across multiple states, properties in high growth areas can offset any poor performers.
2. Have more flexibility in choosing your investment property type.
Perhaps your local real estate market is all single-family detached homes. Or maybe you live in an area full of condos, but lacking stand-alone homes. Investing outside of your local market opens up the possibility of investing in property types that aren’t readily available in your local market.
3. Enjoy higher cash flow potential.
Learning how to create passive income from real estate is one of the biggest perks of real estate investing. And some markets offer better cash flow than other markets. By opening yourself up to investing in out-of-state properties, you can take advantage of areas with high demand and limited supply, which result in higher rental rates and better cash flow potential.
4. Out-of-state real estate markets may have greater room for appreciation.
If your home state is economically stagnant, you might want to consider investing in out-of-state properties with more room for appreciation. The greater the appreciation on your property, the higher the return on your investment.
Los Angeles, for example, saw an increase of 17.4% in the average home value from April 2021 to April 2022, while Boston saw just an 8.5% increase over the same period. By investing in LA real estate, Bostonians could have doubled their rate of appreciation over the past year.
5. Some states are more investor-friendly than others.
If you live in a state like Delaware, the legal requirements burdening landlords may make rental property investment less appealing. You would have to register with multiple governmental agencies and pay for often-unnecessary inspections. Plus, it could take up to six months to evict tenants for non-payment.
States like Arizona, on the other hand, have laws that are more landlord-friendly. But most states fall somewhere in between.
Investor-friendly laws might not be your top priority when evaluating rental markets, but they should be a consideration.
Step-by-Step Process for Investing in Out-of-State Rental Property
The process of how to invest in out-of-state rental property is similar to the process of investing in rental property in general. But you’ll find a few extra steps that need to be completed if you’re investing in long-distance real estate. Here’s a simple 10-step process to follow:
Choose the right market. Focus on states and areas that have higher growth opportunities and solid rental returns. In Los Angeles, for example, the opportunity for growth is substantial due to job prospects and limited housing supply, and rents are high and consistently growing.
Get pre-approved for a mortgage loan. Loan approval criteria are different for investment properties than for your primary residence. It’s best to get pre-approved for a loan early in the process as the amount you’re approved to borrow can inform your price range.
Find a reputable local real estate agent. A knowledgeable real estate agent is your key to learning the ins and outs of an unfamiliar housing market. They can also give you early notice of properties before they hit the market, which can give you an edge over other buyers. Invest some time interviewing multiple agents before choosing one you trust to represent you.
Do extensive research on specific neighborhoods, locations, and any interesting properties. Your real estate agent can advise you on locations and properties, but you should plan to do lots of independent research. Careful due diligence can save you time, money, and frustration in the future.
Double-check the numbers before making an offer. Make sure you’re comfortable with the upfront and ongoing expenses, as well as your projected returns. Review comparable properties to establish a fair market value for the property and to confirm rental rate projections.
Network with local industry professionals. Real estate purchases take a village! In addition to your real estate agent and lender, you’ll be working with an escrow officer, title rep, homeowner’s insurance agent, appraiser, inspector, and possibly a surveyor. Some of these professionals will be chosen by the seller, and some will be chosen by you. When the decision is yours, plan to spend time interviewing multiple professionals and building a working relationship with the team you choose.
Find and choose the right contractors. There’s a good chance your property will need some repair work to make it renter-ready. This could be something as simple as painting and cleaning. Or it could mean a complete rehab, designed to add value to the property. Make a list of the contractors you’ll need and start interviewing them. This is also the time to choose a reputable property manager or property management company to handle the day-to-day operations of the property including tenant screening, rent collection, and lease renewals.
Open local business accounts if necessary. You may want to hold your out-of-state rental property in an LLC to limit your liability. You might also need a dedicated bank account to hold renter deposits. Make sure you understand the legal requirements of holding rental property in your chosen state and arrange your business accounts as needed.
Get the property inspected. A formal home inspection by a certified home inspector is always a good idea. But it’s especially important if you’re buying a property sight-unseen. You need a professional to confirm the condition of the property before you commit to the purchase.
Close on your new out-of-state investment property. Your due diligence is complete, your loan is funded, and all your docs are signed. You’re officially an out-of-state real estate investor! If you purchased an occupied building, you’re all set. And if your new property is unoccupied, now is the time to prepare the property for the market and find renters.
What to Watch Out for When Investing in Out-of-State Property
While there are many benefits of investing in out-of-state rental properties, there are also several things to watch out for. Let’s take a look at a few of the most important potential pitfalls to consider.
Inaccurate valuations and projections
When you’re working with properties outside of your local area, you may be tempted to use data from your own market. This is a huge mistake. Los Angeles real estate market trends will be very different from Chicago market trends. For example, seasonality affects the Chicago market more dramatically than the LA market.
You need to make sure you’re using realistic values for the specific market you’re exploring. This means using local:
Sales comps to calculate property values,
Rental rates,
Appreciation estimates,
Insurance costs, and
Property taxes.
Inaccurate maintenance and repair costs
The same is true of maintenance and repair costs. You may be surprised at how much labor and material costs can differ across the country.
Before you invest in real estate outside of your home state, shop around to find out how much vendors charge for common maintenance and repair services.
Lack of local connections
As a property owner, you often need to rely on the expertise of others to keep your property running as profitably as possible. Real estate agents who can identify a good deal, contractors who prepare your new acquisition for the market, property managers who can find qualified renters with minimal vacancy loss…you need connections. Even if you live next door to your property, you might find yourself needing connections to professionals regularly.
When you live too far from your rental property to handle minor issues yourself, having a reliable support team is even more important. Unexpected maintenance issues will arise. It’s part of the nature of rental property investing. Make sure you’re ready for this inevitability by having a local team you can trust.
Not seeing and understanding the specific property well enough
Virtual home tours have come a long way, but they might not be able to properly convey every detail of the property. If you’re able to visit the property in person, you’ll have a better understanding of the neighborhood, the lot, and the structure. This will make it easier to decide how to market the property to renters. You’ll also get a better idea of potential issues with the property that may need to be addressed before you can take your new investment to the market.
If you must purchase sight-unseen, lean on your local connections to provide real information about the property. Your real estate agent and home inspector may need to be your eyes.
Not being able to find quality renters from out-of-state
Local investors have the benefit of meeting their prospective tenants in person. You can show the property yourself, ask appropriate qualifying questions, and feel confident that your renters will take good care of your place.
When you invest out-of-state, you need to trust your local property management team to find qualified renters on your behalf.
Forgetting or missing important maintenance milestones
Did you know that property owners in parts of Los Angeles must clear away all brush and trim all plants back to specific lengths designated by property type every spring? Failure to comply with the brush clearance ordinance can result in hefty fines.
When you don’t live in the area, it’s easy to forget about these regular maintenance milestones. And fines aren’t the worst outcome. Failing to comply with some of these milestones can put your property, or even your renters, at risk.
Unfamiliarity with local laws and regulations
Each state has its own set of landlord/tenant laws to outline the legal requirements for both parties. These laws often cover issues like
Renter screening,
Maintenance responsibilities,
Late payment penalties,
Rental deposits,
Rent increases (including city regulations like rent control), and
Eviction processes.
Local laws can be as specific as to define how eviction notices must be served.
Failing to understand these local laws and regulations can result in lawsuits. So if you can’t invest the time in learning the local laws (and keeping track of legal changes), it’s best to outsource the management of your property to a professional property manager.
Investing in Out-of-State Property with Gatsby Investment
If you’re looking for an out-of-state investment, look no further than the booming Los Angeles market! The Southern California housing shortage has created unique real estate investment opportunities. And if you don’t want to take on all the responsibilities of out-of-state investment yourself, Gatsby Investment can help! We are an LA-based real estate syndication firm that offers a creative solution to the normal difficulties of investing in out-of-state property.
With Gatsby, you get several key advantages over investing on your own:
Professional management. Gatsby's local team of expert real estate analysts, architects, builders, designers, and property managers handle every aspect of your investment. This eliminates most of the pitfalls of investing in property out-of-state.
Low investment minimums. Gatsby pools funds from multiple investors, which provides a couple of different benefits. First, it gives you access to deals that might otherwise be out of reach financially. Then it also gives you the option of spreading your investment capital across multiple properties, providing instant diversification.
Flexible investment types. Whether you’re looking for a short-term house flip or a long-term multi-family rental, Gatsby has a wide range of projects to meet your investment goals.
Investing in out-of-state properties has never been faster, easier, or more accessible! Sign up for a free account with Gatsby Investment and browse your real estate investment options in the hot LA market today.
