Should real estate investors consider buying an investment property out of state, or should they only invest where they live? This is a debate that has raged for several years now in regards to investing in real estate. While some think that owning property in another state doesn’t make sense at all, others are convinced that out of state real estate investing is the way to go for a higher return on investment.
The fact is that investing in out of state real estate has its advantages as well as disadvantages. Here are some things to consider before acquiring out of state rental properties:
Pros of Long Distance Real Estate Investing
Freedom to Find More Affordable Real Estate
Real estate in major states such as Massachusetts, California, Pennsylvania, Texas, and New York has become very expensive. Since most investors in such states cannot afford to buy property where they reside, it would make sense to look for long distance real estate investing options in Southern and Midwestern states. Besides being cheaper, such areas are also likely to have lower insurance premiums and property taxes.
Owning a Vacation Home
Long distance real estate investing in a condo, multi family home or single family home means that you can use it as a vacation home when you visit the state. If your dependants attend college in the same state, they may live in the home as well. This will save you lots of money on accommodation fees. You can also rent out this vacation home as an Airbnb short-term rental when you’re not using it. In addition, whenever you visit the state, up to 50% of your traveling costs could be written off your income taxes on the basis that you were inspecting your investment property (be sure to consult a professional!).
Owning a Retirement Home
Some real estate investors buy rental property out of state with the intention of living there one day. For instance, you may be considering living closer to your parents in their later years. You could, therefore, consider purchasing a home and renting it out with long-term or short-term leases. The rent collected will pay off your principal until you are ready to retire.
Cons of Long Distance Real Estate Investing
Lack of Familiarity with the Housing Market
Investing in real estate in your own city or town is comfortable since you are familiar with the housing market- how much property costs, how investment property financing works, what kind of tenants you can get, how much you can make through rent and the amount required for property tax. However, long distance real estate investing is a whole new ball game since you probably don’t know much about the market. As a result, it is very easy to make mistakes, thus wasting your time as well as money.
There are ways around this con of long distance real estate investing. Besides using various tools to conduct a neighborhood analysis, you can get information about the area you are interested in from sites such as Trulia or Zillow. You should also consider hiring a real estate agent that has experience buying and selling property in the area. Once you have selected an agent, make arrangements to visit the neighborhood and look at investment properties together. When searching for rental property, don’t overlook short sales, foreclosures and other distressed homes that can be bought at a much lower price.
Limited Network of Service Providers
If you were to invest in real estate property in your own state, you would probably know who to call for a home inspection, mortgage advice, repairs, and management. Long distance real estate investing usually means having a more limited network of service providers. You can mitigate this by asking your real estate agent to suggest the names of reliable service providers that you can work with in the long term. Be sure to conduct a background check on each of them to find out if they are a good fit.
Too Much Reliance on Others
Another downside of long distance real estate investing is that you will not have much control over the day to day activities at your rental property. You cannot just decide to make a random stopover to check on the property. In addition, you cannot look for tenants, collect rent or even handle repairs when required. This means that you will have to hire a professional property management company to manage the investment property on your behalf. Again, your realtor should come in handy for helping you find an experienced professional property manager in the area. Be sure to check their online reviews to find out what tenants and real estate investors are saying about them.
From hiring property managers to inspecting property, long distance property management is possible. Besides email and telephone communication, make use of tools such as Skype and Whatsapp video to communicate with tenants and property managers.
Challenges in Getting Rent Paid on Time
Late rent payment is a problem that many long distance landlords deal with. The solution to this problem is to have an efficient method of collecting rent. For instance, you could ask tenants to deposit their rent directly into your account at a local bank. Alternatively, they could pay using online platforms such as PayPal. To boost timely payment, you could send them a text reminder or email as the month comes to an end.
The main advantage of long distance real estate investing is that you are free to explore the best places to invest in real estate without geographical restrictions. However, don’t make the mistake of jumping into new housing markets blindly. Be sure to carry out your due diligence to ensure that you get a good deal on long distance real estate investing. To find the best rental properties out of state, you need to carry out a thorough neighborhood analysis to find metrics such as cap rate, listing price, cash on cash return, median prices, average rental income, occupancy rate, and cash flow.
Get good tenants and automate lease renewals and rent payments. Hire a property manager and schedule routine maintenance for your rentals. This will minimize vacancy rates and boost your cash flow.