The BiggerPockets community has been buzzing with questions lately about long-distance investing. By “long distance” I mean investors who are usually purchasing property outside of their home state but still within the U.S.
If you’re among the crowd that invests across state lines or think you’d like to join, well, this article is for you.
Once you’ve read it, you won’t be asking whether you need a lawyer’s advice (yes, you do), if you need to do anything special when investing elsewhere (yes again), or what basic legal requirements you should be on the lookout for (I’ve got you covered there, too).
Be the smartest investor in the room when it comes to this topic. Read on to learn much more about the implications of investing across state borders, as well as some of the major differences you will encounter when transitioning beyond your home state.
Location Matters for Your Real Estate Business
Your home state may not be the best investment market—and investing would be quite limited if we all had to shop in-state. Portfolios would be forcibly scaled down. But you’re here to grow your business and need not fear forming entities or conducting business in another state.
State of formation issues can crop up around the entities asset protection pros like us rely on to defend investors like you. They are, however, less likely to occur if you have an involved professional advising you about the best options with regard to where to form your business. While your home state or a state where you own property may seem like natural choices, they may not be the best tactical choices from a lawsuit prevention perspective.
The truth is you have your pick of any state in the union (usually). In some cases, like for the California investor, state law can actually dictate which structure is best to use. (Note to Californians: It’s the DST. Read about the Delaware Statutory Trust here.) But most investors have access to LLCs and Series LLCs, and you can even form those in the state in which you plan to invest.
In some cases, you can lower or even avoid state-level taxes by forming in another state. For example, if your state has income tax, you can do business out of my state, Texas, and avoid income tax altogether.
If you choose to operate in a state with income tax, you must pay it to maintain your company’s compliance. If you’re unclear about the tax obligations you’re facing, a CPA may be the most helpful person to speak with.
As long as you’re represented in the state you’re doing business in, say by one of those handy attorneys or registered agents we mention below, you don’t need to worry. Such pros should be able to help you out or take over compliance management for you.
Learn the Art of Managing the Management
Another player you’ll need on your real estate dream team if you’re investing out of state is a rock-solid property manager or property management company. This is more of a practical than a legal concern, but having attentive and proactive property management can also keep you out of legal trouble.
After all, you can’t be everywhere at once. Locally, you may be able to handle some issues. But somebody needs to be around the property consistently.
Even an informal helper is better than nothing. However, a company may be the best option if you own many properties in many states. You need eyes and ears on the ground that you can rely on, so find some—whether through a trusted individual or third-party property management company.
Know the Legal Requirements for Investing Out of State
Both your home state and the state(s) you own property in can influence which laws you must follow. While every situation is different, you can be pretty certain that you’ll have to meet specific requirements. For instance, no matter who you are or what type of investment you have, if you’re investing in another state, odds are good you will need something called a registered agent.
There are a number of ways to fill the registered agent legal requirement:
- Hire a specific registered agent service. These do not tend to be extraordinarily costly.
- Work with a firm that offers registered agent or compliance services. You may end up being able to pay the same amount for a registered agent and additional legal services or advice.
Investors who use these kinds of services tend to do so to save time. There are rare situations where one could serve as their own registered agent. But given that this individual is the person responsible for all of your legal correspondence, it’s usually wise to delegate the duty. You can’t, or shouldn’t, do it all.
One issue that may come up for you, depending on which asset protection entities you use, is the issue of Foreign LLC registration. Some trust structures aren’t required to pay for this, avoiding this fairly expensive problem entirely. Your attorney may be able to help you figure out what, if any, obligations you have.
You should probably speak with a lawyer about your state-specific obligations anyway. The attorney’s location isn’t critical, provided they are permitted to practice and are familiar with the location’s laws (even an out-of-state lawyer can look up law or may have experience handling such issues).
Do I Need a Lawyer to Invest Across State Lines?
Technically, no. In reality? Yes.
Here’s why: There’s too much to mess up. You want an advisor who can do the bulk of the heavy legal lifting in terms of guidance and experience. Investing across state lines will subject you to several situations where you’ll want a real estate lawyer anyway.
Check out my previous BiggerPockets piece on when you need a real estate attorney to read about some of those scenarios. You’ll most likely end up in at least one of them in your investing career.
Optimally, you want a real estate attorney with a presence in the state where you’d like to form your company. Note my wording there. I didn’t say that attorney must be from, live in, practice exclusively in, or work from that state.
Many attorneys—myself and many colleagues I admire included—are able to form a company for you virtually anywhere in the U.S. The only way to find out if a particular lawyer offers a particular entity is to ask.
I mention all of this to make an important point again. Your lawyer’s abilities and experience matter most of all. Find someone you trust, and ask for what you need.
I hope this article helps you make some of the decisions you’ll need to begin investing out of state. You should find the rewards of expanding into markets countrywide to be worth what little time you’ll spend managing the minor issues discussed here—if only for the greater selection of properties and possible deals.
Do you have any other questions for me about the legal ins and outs of investing out of state?
Ask me in the comment section below!