Investing in Rental Property Out of State: Is It Right for You?

Adding rental properties to your investment portfolio is an effective way to increase your income and benefit from long-term investments. If you’re a real estate investor, there are several methods you can use to buy properties.

For example, you can purchase a fixer-upper to renovate and repair, after which you should be able to sell the property for a profit. While this strategy can help you earn high profits, the downside is that it’s a short-term investment with a lot of risk.

Investing in rental properties is a long-term strategy that allows you to buy a home or apartment building and rent it out to tenants. While there are numerous costs you must pay for, you’ll earn income whenever you collect rent.

Among the important aspects of making the right rental property investment is location. People typically want to move to areas with ample amenities, job opportunities, and accessibility. Renting out a home in a good location increases the likelihood that you’ll attract qualified tenants.

When investing in rental real estate, many people choose to buy properties in areas that they’re familiar with. The main issue with this approach is that it limits your options. You can mitigate this issue by making an out-of-state rental property investment, which means that you’ll have access to homes at any price range. This guide offers an in-depth exploration of out-of-state rental investments and the advantages of adding them to your portfolio.

Benefits of Investing in Rental Property Out of State

There are many reasons why investors choose to place their money in out-of-state rental properties. The main advantage of this approach is that it allows you to diversify your investment portfolio.

If you’ve bought multiple rental properties from your state, a local economic downturn could hurt the value of your portfolio. In comparison, a portfolio that’s properly diversified with properties from multiple states and cities should be able to weather a recession.

There’s also a potential for higher returns if you can invest in emerging markets. If a major corporation has just moved to a smaller city, the following economic boom could cause property values to increase considerably in a short period. Investing in out-of-state rentals may also give you access to markets with more friendly landlord-tenant laws. While Louisiana and Alabama are considered to be among the most landlord-friendly states in the country, Vermont and Nebraska have some of the most restrictive laws.

You may also gain opportunities in areas with lower property prices. Buying rentals at low prices isn’t a bad thing. If you invest in the right location, there’s always a possibility for rapid growth. Even if this doesn’t happen, the risk of investing in these properties is low. You may be able to make a sizable profit without charging a high rent.

Challenges of Investing in Rental Property Out of State

While out-of-state rental investing has a lot of advantages, there are also some difficulties that you may encounter. For example, managing the property remotely is more challenging than doing so in person. If you live near your rental property, you can visit it anytime you want, which isn’t feasible with an out-of-state rental. This issue is remedied by hiring a property management team.

When you invest in rental property out of state, there’s a potential for higher maintenance and management costs. If you choose to manage the property yourself, traveling to another state regularly can cost a substantial sum of money. Since you won’t know any local maintenance providers, you may be unable to get favorable rates.

There are always going to be risks associated with investing in unfamiliar markets. If you don’t understand the area, you might invest in a bad location. When you don’t have local community connections with real estate agents, it’s easier to make the wrong decision.

You can navigate all these issues by building a reliable local team. Doing so, however, is challenging. You’ll likely need to hire a reputable real estate agent and skilled property management team, which can take time and a considerable amount of research.

Factors to Consider Before Investing Out of State

Before you invest in out-of-state properties, there are some key factors to consider. For example, you need to research and understand the local market to ensure you buy the right property.

Before making an offer, research the city or county to avoid buying a property with building code violations that are costly to fix. You also don’t want to make the mistake of buying a rental that needs a lot of maintenance because it’s been vacant for a long time. Consider visiting the property in person and hiring an inspector to look at the home and assess its condition.

When doing your research, evaluate recent economic and rental market trends. If local unemployment numbers are increasing while average rent prices are decreasing, you may want to avoid investing in that area until rental market trends improve.

Make sure you understand local landlord-tenant laws and regulations as well. These laws can inform you of who’s responsible for making repairs and how long it takes to evict a bad tenant. If you make a decision that effectively breaks landlord-tenant laws, you could lose an ample amount of money while attempting to resolve the issue.

It’s also highly recommended that you assess the availability of local property management services. Thoroughly vet every option to ensure you make a good choice. The property management team you hire will be responsible for collecting rent, screening tenants, and performing maintenance on your behalf, which is why it’s important that you do your due diligence.

Comparing In-State vs. Out-of-State Rental Property Investment

When comparing rental property investment different states or same state, consider weighing the pros and cons of both options. If you solely invest in rental properties in your own state, you’ll benefit from being able to build a team more efficiently. It’s easier to find a real estate agent you can trust, which means that you should receive their local knowledge. If you also have considerable knowledge of the area you’re investing in, searching for a property to invest in shouldn’t be too difficult.

However, in-state rental property investments can also have significant problems. As mentioned previously, adding too many in-state rental properties to your portfolio can become a problem if the state experiences an economic downturn or recession. In this scenario, you may not have properties that can counteract these losses.

As for out-of-state rental property investments, there are numerous advantages associated with them. For example, you’ll have many more properties and locations at your disposal. Depending on where you live, investing in out-of-state properties may also give you access to more affordable rentals. In the event of a recession, having a diversified investment portfolio may help you stay afloat.

There are numerous hurdles that you must navigate with these properties. For example, managing an out-of-state rental isn’t easy. If you decide to do it yourself, you’ll need to take expensive trips regularly. In comparison, you should be able to manage in-state rentals without too many problems.

When considering costs, in-state rental properties are usually more affordable. You may be able to bypass this issue by hiring a property management company that knows the area and has strong relationships with local maintenance workers and repair companies. While both types of investments can be risky, out-of-state rentals have slightly more risk because of the need to hire professionals you don’t know for a property you can’t visit often.

Building a Strategy for Out-of-State Rental Property Investment

There isn’t a single strategy that makes it easy to invest in out-of-state rentals. There are, however, steps you can take to build a sound strategy that makes it possible to effectively analyze your options. For example, you can conduct thorough market research by analyzing the area you’re about to invest in. Measure factors like economic strength, unemployment, rental demand, and housing prices to determine if the location has a solid rental market.

To build a local network of real estate professionals, perform extensive online research before hiring anyone. You can effectively identify the reputation of a real estate agent or property management team by looking at online reviews, interviewing them over the phone, and comparing multiple options before making a choice.

If you choose to perform remote property management, it’s crucial that you hire a property manager who can handle almost everything for you. A professional needs to be on hand to perform evictions, collect rent, and make sure the property remains in good condition.

Even if you hire a property manager, perform regular inspections and visits. If you make a poor choice when hiring a property manager, you might not know until you visit the rental yourself. Try to visit twice per year. It’s a good idea to schedule property inspections around these visits.

Financing Your Out-of-State Rental Property Investment

Finding the right financing for your out-of-state rental isn’t much different than the process of doing so for an in-state investment. Before making an offer on a rental property, seek pre-approval from different lenders in the same area as your property. Research local interest rates to make sure you’re getting a good deal.

Keep in mind that mortgage terms and conditions can differ depending on the type of loan you’re approved for. Your best bet is to work with a national bank. Their terms don’t vary that much. A local bank might have different requirements that you’re not used to, which is why you should speak with any lender you’re considering for financing. Only work with lenders who have at least some experience with out-of-state investments.

Legal Considerations for Out-of-State Rental Property Investment

There are a few legal considerations that you’ll likely encounter when buying an out-of-state rental. Every state has its own laws and regulations regarding property taxes and rentals. You’ll also be tasked with filing a nonresident state income tax return if you make any money from the property. Any legal mistake you make can be costly, which is why you need to work with local attorneys who can help you perform your legal due diligence.

Conclusion

Investing in out-of-state rental properties is a great way to expand your portfolio and invest in new markets that aren’t available in your state. While it can be risky to buy a property in a location that you don’t know that well and can’t visit whenever you want, there’s a lot of upside to this investment strategy that you won’t have if you focus solely on in-state rentals.

To determine whether investing in rental property out of state is right for you, consider the pros and cons. Analyze the strategy based on your individual investment goals and circumstances.