I can already feel the heat from a lot of you prospective out-of-town investors and existing out-of-state investors, but nonetheless, I still want to talk to you about why you should not invest in real estate out-of-state.
It’s Significantly Harder to Find a Good Team From Afar
The first reason is this: The likelihood of you finding the right people to help you succeed in your out-of-state endeavors is next to none. You’ll need to have a trusted real estate agent, a good property manager (good luck with that one), and a good contractor (again, good luck with that one). You’re probably going to have to have a good attorney, accountant, title company, maintenance personnel, and eviction attorney. All of these people are going to be influential to your success.
Another thing that I want to mention is when things turn south, it’s a very long drive to go and try to fix those issues. What tends to happen is when the cat leaves, the mice come out to play. The problem in this situation is the cat is never around, so the mice are always playing. I honestly think you are going to run the risk of being overcharged for absolutely any and everything that you could imagine—for construction costs, property management, and even various attorney’s fees. I think the people factor is very important when it comes to successfully investing in real estate, and I think that finding the right people out-of-state is going to be hard to do.
You Probably Won’t Get the Best Deal
The second thing is you will not get the best deal. Everyone I talk to says they are awesome at conducting due diligence online, looking at all the stats and demographics and all of that mumbo jumbo. Do you really think that you’re going to find a better deal for a better price than someone like me who is in the office 14 hours a day, who has done over 500 deals? I know everyone in town, I’m a cash buyer, and I know every rock to look under. The likelihood of anyone out-of-state or country finding a better deal than me is once again next to none.
So when you are investing out-of-state, you have to understand that you’re probably going to be paying more than you should for the property, and hopefully you’re not going to be paying more than market value if you’re investing through a turnkey company. But like I said, I just don’t think that you are going to get the best deal, and that’s something that you have to add into your calculations when looking to buy the property. Another thing is you’re going to get nickel-and-dimed with miscellaneous costs because again, the cat is not in town. So you also have to take that into consideration when calculating your return on investment. You have to remember to underestimate your income and overestimate your expenses.
Navigating State Laws is Complex
That leads me to the third and final reason why you should not invest out-of-state, and that is the complexity that comes with it. I’m talking about the complexity that comes with setting up the right legal structure. Every state has different laws, from an eviction standpoint and setting up an LLC to lawsuits, all of which an attorney is nickel-and-diming you for. And then there’s also the tax liability of investing out-of-state. Once again, I’m not an accountant, but federal, state, and city taxes are all different depending on your income and the other investments that you have. You don’t know what tax bracket you are going to fall into or what your tax liability is going to be when you are investing in that particular state.
Those are the three reasons why you should never invest out-of-state. If you think I’m wrong, please comment below. Of course, there is nothing necessarily wrong with any piece of real estate as long as the price is right—and that could be out-of-state or out of the country; I just think it’s more likely to be in your own backyard. Thanks for listening.
Do you agree? Disagree?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.