Buying investment property out of state can be a great way to diversify your real estate portfolio and take advantage of more affordable markets with higher rental yields. However, out-of-state investing does come with unique challenges that need to be considered. In this comprehensive guide, we will walk through the key steps, analysis, and tips for successfully investing in real estate outside of your home state.
Conduct Thorough Market Research on the Target Area
When looking to buy investment property out of state, the first critical step is conducting in-depth market research on the city and neighborhood you are considering. Look at population and job growth, the health of the local economy, crime rates, school rankings, and other demand drivers. Drive through the target neighborhoods to get a feel for the area. Study rental rates, vacancy rates, and seller markets trends to calculate potential returns and cash flow. Look for markets with affordable property prices but strong fundamentals that will lead to price appreciation over time.
Understand Tax Implications Across State Lines
Buying property out of state also comes with tax considerations. You will likely need to file taxes in the state where your rental property is located. There may be higher property tax rates as an out-of-state owner. Factor these costs into your investment analysis. Hire a knowledgeable tax professional to ensure you are compliant with state and local tax laws.
Find and Vet Property Management Companies
A key step for out-of-state investors is finding a reputable property management company to handle leasing, maintenance and repairs. Property managers are your boots on the ground, so they must be professional, responsive and truly understand the local rental market. Interview several companies and check reviews and references thoroughly. Also, understand typical property management fee structures.
Travel to Visit Properties Before Buying
While you will rely on your property manager for ongoing oversight, it is still wise to visit any property yourself before purchasing, if possible. Walk the neighborhood to verify your research. View the property in-person to evaluate condition and get a true feel for the location that photos may not show. If an in-person visit is not viable, at minimum request extensive photos, videos and documentation from the seller or real estate agent.
Use Investment Property Mortgages, Not Primary Home Loans
When financing out-of-state properties, use lenders that specialize in investment property mortgages, not primary residential home loans. Investment property loans typically require 20-25% down payment and have higher interest rates. But they also have tax benefits and less stringent qualifications based on your intent to rent the property out.
Buying investment property out of state has unique complexities but can be very rewarding if done right. Follow these key tips on conducting thorough market research, evaluating tax implications, finding a property manager, traveling to visit before buying, and using the optimal financing strategies.