by Michael Del Prete
As you probably know by now, I’m a huge fan of owning rental real estate. I believe it’s one of the best ways to ultimately achieve your financial goals. Purchasing properties locally may seem like the only option. However, when it comes to investing out of state, you’ll find that every market can present its own opportunity, whether it’s steady cashflow in lower-end markets or appreciation in markets where jobs and population are on the rise. Ultimately, as a successful real estate investor, it’s up to you to decide.
In this article, we’ll discuss the pros and cons of investing out of state. However, before we dive in, when people hear I’m buying rentals and wholesaling real estate in Cleveland, OH from my office here in Phoenix, I hear things like:
“That’s too risky. I need to see and touch what I’m buying.”
“I don’t have time to travel across the country every month.”
“What if something needs to get fixed, who will I trust?”
(For the record, I’ve been investing out of state for the last 14 months. I’ve completed 30 wholesale transactions, own 10 rental properties and am working on my third refi with a local lender. I’ve only been to Cleveland once, walked through one unit of a duplex, and have no future plans to visit.)
Traditionally in the real estate industry, you’ll be told to buy something in your own backyard, something within driving distance so you can always check up on the property. It’s also good to invest in your backyard if cash flowing properties are widely available, but if you’ve been paying attention to our local market you most likely have noticed your ROI declining on longterm rentals.
You might be saying to yourself, I’ll just turn it into a vacation rental. Great! It’s definitely an option, but just be aware that investing in vacation rentals means you’re now entering the hospitality business as well. Although I love short term rentals, it’s not for everybody.
Below are the advantages of investing out of state. Over the last several years, as the technology and resources have become more accessible, it’s been a lot easier to invest outside of our local market. If any of these Pro’s sound appealing to you it may be a sign to look into it a little further.
PRO’S
Diverse Portfolio
Having rental properties in multiple cities or states can mitigate your risk. Each state will have local factors that directly affect the market such as the loss of a large employer, new regulations, and fluctuating markets. Rather than investing in one market, successful investors hold multiple properties in a few of the right markets.
Greater Returns
The potential of a greater return is the main reason that investors will pursue purchasing properties out of state. If you live in an area where purchasing properties are more expensive, you may capture appreciation, however, this can be speculative. Investing out of state is about the cash flow and the buildup of equity as your tenants pay down your mortgage. If you gain some appreciation, consider it an added bonus.
Easier to Enter Other Markets
Living in Arizona, property values have skyrocketed up to 23% this year. Becoming a landlord can feel hopeless. As you already know your profit is made when you buy not when you sell. Buying in a smaller market there can be less competition and more options to purchase cheaper properties. Buying at a lower price point gives you more of an equity cushion if prices were to go down.
CON’S
Uncomfortable Feeling
When investing out of state, you may be buying properties that you’ve never seen. You’ll have to rely on contractors and inspectors you’ve never met. This can make anyone nervous, so you need to be prepared to give up a level of control you’d usually have when investing locally.
Building a Team Can Be Challenging
Assembling a rockstar team can be a struggle even locally. It can feel impossible when you’re investing out of state. Finding real estate agents, contractors, and an excellent property management team can be significantly more difficult when you don’t have local connections.
Uninformed with State and Local Laws
Landlord-tenant laws vary state-to-state. Additionally, each county and city may have its own local laws. Every landlord should have an informed property management company to consult with when new policies are put in place. New laws are constantly being passed which can put strains on your ROI. If anything requires a vote to be passed, you are not a resident and will not have input. Consider investing in a landlord friendly state where laws are in favor of the landlord.
Final Thought
The moral of the story is just like any other type of investment, buying property out of state does come with some risk. However, your risk can be reduced once you’ve built your team and put the right systems in place. You’ll find that your time will be spent reviewing reports, paying some bills, and communicating with the leaders of your team. Over the last year I’ve found that investing out of state offers higher ROI opportunities, lower risks, and an increased cash flow.
