Real estate investing can be an exciting and fruitful opportunity to generate more income and solidify your financial health. Out-of-state property investing takes this to the next level. By exploring markets other than where you live, you may find it that much easier to set yourself up for success.
But it’s important to realize that investing out of state can also be risky, particularly if you are new to real estate. This guide will help you understand both the benefits, the drawbacks and the best way to achieve your financial goals.
Why Should You Invest Out of State?
There are clear benefits to investing out of state. Firstly, it allows you to diversify your portfolio. When all your properties are in one city or state, you are in a precarious position. One event—like a natural disaster or a factory going bust—could wreck your entire portfolio.
Out-of-state property may also be cheaper. If you live in a high-cost area, such as New York, then real estate investment may not be realistic for the average person. By expanding your search out of state, you can find gems that are better suited to your level of investment.
Finally, not all property markets have the most investor-friendly laws. You may be in a city or state where investment isn’t incentivized or laws highly favor tenants. In these instances, it’s wise to look elsewhere.
What Is Your Investment Strategy?
If you do plan on investing in property out of state, then it’s important to go into it with a plan. A clear investment strategy will help you streamline processes, stay focused and avoid pitfalls.
Investing for cash flow, appreciation or both
For long-term property investing, there are generally two strategies: cash flow investing and appreciation investing.
Cash flow refers to the rental income left over after all expenses have been paid. Investing for cash flow involves seeking a property that can seemingly produce strong, consistent rental income long-term. For this strategy to be successful, it’s important that the property meets several criteria:
-It can be purchased at a discount.
-It is located somewhere with strong rental demand.
-Average rents of nearby properties are sufficient.
-Property expenses are low enough to turn a nice profit.
-All of the above are provable mathematically.
While you can sell the property whenever you’d like, the idea is to keep it for the long-term and reliably generate income.
Investing for appreciation, on the other hand, focuses on choosing properties wherein the overall value of the real estate will theoretically increase over time and can then be sold for a profit. In this case, the strategy relies less on renters and more on fundamentals like the neighborhood, the city, community development, large employers moving nearby, and so on. Ultimately, the intention is to sell the property for well above what you paid rather than generate ongoing income through rents.
Alternatively, you may opt for a mixed approach that focuses on both cash flow and appreciation. Finding a property in this sweet spot would allow you to generate a good income while you own the property and also make a great return once it’s sold.
Flipping is a short-term investment strategy where the aim is to buy a property that is undervalued (for reasons that will be explained) and then sell quickly for a profit. The advantage is fast cash and eliminating the expenses of holding property.
Typically, there are two situations where a property is undervalued and therefore prime for flipping. Either the owner is under financial distress or the property needs extensive work done. Both mean buying at a discount. In the second case, renovations are also necessary prior to selling.
How To Find the Ideal Market for Investment Properties
Once you’ve decided on your strategy, the next step is to choose an appropriate out-of-state market. The United States is a wonderfully diverse country—and so are it’s housing markets. While one area may be great for cash flow, another may be better for appreciation.
Here are some of the best markets for cash flow investment:
There are several factors that make a market strong for cash flow investment. The most important include the potential yield, cost of housing, wage growth, unemployment and rental demand. Essentially, the market needs to be healthy and attractive for the renters you hope to entice.
Here are some of the best markets for appreciation investments:
-Los Angeles, CA
-New York, NY
There are a number of factors that determine whether a market is good for appreciation investing. The biggest factor is demand. Coastal cities and economically important metropolises are typically in high demand, but fast-growing emergent cities are a great choice, too.
It’s important to do your due diligence when looking for the right investment market. Tools offered on sites like Mashvisor can greatly help with the process.
Build a Team
The final issue you need to consider is building the right team. As you are investing out of state, you may well be thousands of miles away. So, you need a team you can rely on to deal with issues that may arise.
Here are a few key players and their roles:
- The right property manager can handle many of the headaches associated with things like ongoing maintenance.
- A good estate agent can help you get the best price when buying or selling and navigate the more technical aspects of closing the deal.
- Finally, a contractor will be invaluable if you need to do repairs or renovations.
Out-of-state investing can be both exciting and lucrative. It allows you to diversify your property portfolio while also taking advantage of the best investment conditions across the country. However, there are certainly pitfalls that you want to avoid.
By having a clear investment strategy, doing your research before choosing a market and building a team you can rely on, out-of-state investing can be a great addition to your portfolio… even if you’re a newbie.