Investing in out of state property can be an attractive option for real estate investors looking to diversify their portfolios. With the ability to tap into different markets and take advantage of varying economic conditions across the country, out of state real estate offers potential for cash flow and appreciation. However, buying property in unfamiliar territory also comes with risks like lack of local market knowledge, property management challenges, and extra travel and oversight expenses. This article explores the pros and cons of investing in out of state property to help investors make an informed decision.
Out of state property investment allows tapping into new markets with growth potential
One of the main appeals of investing in out of state property is the ability to identify real estate markets with strong fundamentals and growth prospects that investors may not have access to in their home states. For example, regions like the Southeast and Southwest have seen influxes of companies and residents in recent years, fueling housing demand and price growth. Buying rental properties in these high-growth areas while they are still relatively affordable can pay off handsomely in cash flow and appreciation over time. Conducting in-depth market research is key to finding the right out of state markets that align with your investment goals and risk tolerance.
Out of state investment diversifies geographic market risk in real estate portfolio
Concentrating all properties in one geographic market exposes investors to risks associated with local economic shifts. Investing out of state creates geographic diversification, allowing part of the portfolio to still perform well if conditions decline in the home market. For instance, an investor with all properties in Los Angeles may suffer if entertainment industry jobs decline, while their units in Texas can still deliver stable rental income. Building a balanced national portfolio protects against unforeseen events or downturns affecting any one metro area.
Management and oversight of out of state properties pose significant challenges
While investing remotely opens up more markets, it also removes the critical ability for direct and regular oversight of properties. Traveling to visit each property regularly may be unrealistic given time and budget constraints. As a result, out of state investors rely heavily on property management companies to handle maintenance, repairs, tenant screening and leasing. However, even the best property managers cannot provide the same level of monitoring and personalized tenant relationships as local owner-investors. Communication and accountability problems with remote property managers often lead to surprises around property condition and financial performance over time.
Limited familiarity with out of state markets raises risk of buying bad properties
Making sound real estate purchases requires an intimate understanding of the hyperlocal market conditions determining property value and rental demand. When buying out of state, investors lack that on-the-ground insight on factors like neighborhood quality, school districts, development plans, and housing supply/demand trends. Unable to vet properties thoroughly, remote investors often pay inflated prices or buy poor quality assets without realizing it until major problems surface later on. Touring potential purchases in-person helps but still cannot match the market mastery of local investors who constantly have eyes and ears on the latest developments.
In summary, investing in out of state property allows tapping into new markets and diversifies geographic risk, but also poses management, oversight, and information challenges from investing remotely without local knowledge. Investors must weigh the higher returns possible from buying in high-growth markets against the higher risks that come with limited boots-on-the-ground ability to vet assets.