Investing in real estate out of state has become an increasingly popular strategy for investors seeking diversification and higher returns. However, out-of-state real estate investing also comes with unique challenges that need to be considered. This article will provide an overview of the key strategies, risks, and factors to weigh when investing in real estate in another state from where you live.
There are several motivations for investing in real estate out of state. The obvious one is diversification – spreading your real estate assets across different markets can help manage risk. Investors may also target faster-growing real estate markets in other states that offer better cap rates or cash flow potential. Some investors choose out-of-state real estate to invest in vacation or resort markets as well. However, out-of-state also means less control and harder to manage properties. Critical factors like property management, understanding local markets, and building a team become more difficult from afar.
Ultimately, smart out-of-state real estate investing requires meticulous research, trusted partnerships, and accepting higher risk. But with the right strategy, it can also unlock higher returns and valuable market exposure.
Thorough market research is essential for out-of-state real estate investing
The key to successful out-of-state real estate investing is understanding the target market as much as possible before buying. Investors should research key metrics like population and job growth, housing demand, cost of living, infrastructure development, and more. Talking to several local real estate agents can provide valuable boots-on-the-ground insights as well. Traveling to tour potential investment areas and meet partners is ideal if possible. The risks of buying real estate site unseen are substantial. Out-of-state investors must dedicate significant time to gathering market data, touring target areas, and verifying information on the ground.
Property management is make-or-break for out-of-state real estate
For out-of-state investors, a trustworthy and competent property management partner is absolutely essential. Without proper local oversight, remote real estate investing becomes extremely high-risk. Investors should thoroughly vet potential property management companies, check reviews and references, and inspect current properties they manage before agreeing to work together. Clear expectations around responsibilities, communication systems, reporting, and fees must be established early on. Hands-on investors may visit and inspect properties periodically still. But fundamentally, out-of-state investors must find great property managers they can depend on to protect their assets.
Lower-risk out-of-state real estate strategies rely on local expertise
Those new to out-of-state real estate investing may consider lower-risk strategies at first. REITs offer exposure to commercial real estate in other markets without being an absentee landlord. Real estate syndications led by specialized firms can provide access to larger assets and their expertise. Crowdfunding platforms also allow investors to buy small shares of out-of-state properties. While returns may be lower, having trusted professionals navigate unfamiliar markets can be worth it initially. As investors gain experience and build knowledge, they can pursue more hands-on out-of-state opportunities.
Focus on fewer out-of-state markets to start
It’s generally wise for out-of-state real estate investors to target just one or two new markets at first. Investing in real estate all over the country makes conducting proper due diligence on each market extremely difficult. Focusing on fewer markets allows investors to build a strong understanding of local trends, establish partnerships with agents and managers, and identify the best areas and assets to buy into. Once they gain experience in a market, investors can expand geographically in a slow, controlled way over time. Patience and discipline is key.
Out-of-state real estate investing offers potential rewards but requires extensive research and reliance on local partnerships. Investors must thoroughly analyze target markets, establish trusted property management, and consider lower-risk strategies initially. With proper diligence and a long-term approach, the benefits of geographic diversification and exposure to new markets can outweigh the risks and hassles.