There are many different ways to invest in real estate. When new investors think about making their first purchase they usually think about properties exclusively in their local market. Large contingents of investors never stray outside of their immediate area. However there are times and situations when an out of state property makes an attractive alternative. For the right investor and the right property this can open up a whole new way to invest. Like most things in the real estate world there are two sides to every coin. Here are some pros and cons to investing in out of state properties.
PROS:
- Increased Supply. You can have the desire to invest but if there is limited supply you may not have the results you are looking for. In areas with limited supply the best properties are typically gobbled up quickly. This can become very frustrating. A logical alternative is to look at properties outside of your investing area. An out of state market can double or triple the number of properties you can purchase. Increased supply gives you increased opportunity and can completely change the way you look at investing in real estate.
- Reduced Purchase Price Range. There are many markets near big cities that can very expensive to invest in. Regardless if you are using bank financing or hard money lending this can be a difficult barrier of entry. By looking at markets 500 miles away the purchase price range can be a fraction of the cost. This can change the type of properties you look at and the amount of work you are able to do. Anytime you can get a better bang for your buck it is an interesting proposition.
- Higher Returns. In your local market you may be capped at what kind of returns you can expect to receive. Investing in out of state properties may open you up to markets yielding two times your expected returns. With increased returns there are usually greater risks but some investors are willing to pay the price. If you are interested strictly in the numbers an out of state property may make the greatest sense.
CONS:
- Information. Investing in out of state properties requires a bit of a leap of faith. While technology has made the investing due diligence process as easy as ever it is not without some flaws. Nothing can replace physically putting your eyes on the property. You can look at pictures and videos but it is not the same as viewing it yourself. Certain towns have more information on their websites than others making it easier to research potential deals. Regardless if you are buying five minutes from where you live or five states away you need to know as much about the property as possible. Getting the right information with an out of state purchase is not always the easiest thing to do.
- Building A Team. One of the keys to a successful out of state purchase is the strength of your team. Think about who would need to make a successful purchase in your local market. Your real estate agent, attorney, contractor and property manager are just a few of the people you need to reach out to. Finding people in an out of state market is not the easiest thing to do. You need the patience to talk to a handful of people before settling on the right one for you. Your team will act as your eyes and ears in the local market. The stronger your team is the better chance you have at success.
- Letting Go. Real estate investors are micromanagers by nature. They want to know everything about the process from start to finish. Even if they aren’t experts in home repairs or reviewing a contract they will act like it. With an out of state properties you need to take a leap of faith. You cannot be there to answer every question and resolve every dispute. Before you make an out of state offer you should change your mindset. This requires you to trust your attorney, real estate agent and property manager. If you can’t let go you will end up worrying about the property at night and eventually that will impact the rest of your business.
- Costs. Taking a trip to check on your out of state portfolio can be costly. Even with gas prices greatly reduced driving is time consuming. The alternative is flying with is typically much more expensive. Once you get to your property you probably need a place to stay. You will also need to eat a meal or two once you get there. While individually these costs will not break the bank but they will add up quickly. You may also have to pay for local rental licenses and even networking groups. These figures have to be accounted for when calculating your bottom line.
Your personality and risk tolerance will go a long way in determining if an out of state property is for you. Greater than average returns won’t make a difference if you are up all night worrying about the property. Like any property local or out of state you need to look at the risk vs. the reward. Out of state investing typically offers greater returns but the risks are also much higher.
