6 Questions to Ask Before Committing to an Out-of-State Rental Property

6 Questions to Ask Before Committing to an Out-of-State Rental Property

3 min read
Larry Alton

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment, and technology.

Experience
Larry started his career with Demand Media. There he contributed to and edited nearly every type of business-related content from real estate investing to software and digital media.
Since then, Larry has worked as an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include top-tier publications like Entrepreneur Media, TechCrunch, and Inc.com.

When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization.

As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

Education
Larry graduated in the top 2% from Iowa State University’s Ivy School of Business Management.

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When you’re a real estate investor living in a city with outrageously high housing costs, it can be more sensible to buy real estate properties out of state.

The 2017 Rental Index Survey put San Francisco at the top of their list of the most expensive rental cities in the world at $4.80 USD per square foot. Although that’s the rental price, that kind of a market can translate to a lot of dough if you’re looking to buy property. And it’s not like there’s anything special about higher priced homes. Their value is based mostly on location, and property value can vary greatly across state lines.

For example, the average 1,500 square foot, 3-bedroom, 2-bathroom home in Cupertino, CA built in 1960 can sell for close to $2 million. On the other hand, a nearly 3,000 square foot, 4-bedroom home in Yelm, WA built in 2012 can sell for a mere $330,000.

When you can purchase an entire house out of state for what would only be the down payment in your neighborhood, that’s motivation to consider buying out of state.

But like any investment, there are potential risks that must be weighed before making the commitment.

Related: Why It’s About to Become a LOT Easier to Invest From Afar in the Next 5-10 Years

Here are 6 factors you’ll want to consider before committing to buying any out-of-state property.

6 Questions to Ask Before Committing to an Out-of-State Rental Property

1. Are your expenses going to be higher than usual?

When you’re from out of state, you’re more likely to be considered a high-risk borrower. This can lead to higher homeowner’s insurance rates, down payments, and even mortgage interest rates.

Owning rental property out of state can also create a complicated tax situation for you since you’ll be earning income in multiple states. Be prepared to hire a tax professional to handle your taxes in this case.

You’ll also want to visit your property in person on occasion. This means adding the cost of travel and accommodation to your list of expenses. Like with any expense, there are ways you can get special deals, like searching for flights on a Tuesday or departing on a Wednesday.

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2. Is there a local, reputable property management company?

Being out of state makes it difficult for you to just pop over and check on your property. It also makes it extremely difficult to handle tenant problems and repairs or even to collect rent.

Before you purchase out-of-state property, do some research and find out if there’s a local property management company with a great reputation that can handle the technical aspects of your property for you. Most property management companies will even screen potential tenants for you as part of their services.

3. What is the foreclosure rate of the area?

A high foreclosure rate in the area is a sign of trouble. Before making any decisions to purchase an out-of-state property, you’ll want to find an area with a strong economy.

4. Is the ROI worth it?

The factors that affect ROI have the potential to give you an advantage in some states. The homes may be cheaper to purchase, the appreciation rates may be greater, mortgages might be lower, and rental market conditions could be more favorable in another state.

Although you may see factors up front that can increase your ROI, there are other factors to consider that may end up decreasing your ROI on the back end—taxes, extra fees from lenders for being from out of state, and even property management fees. Or, if your property is in an area that doesn’t have a good market, you may have a hard time collecting the rent you need to cover the mortgage and make a profit.

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Related: Looking to Invest Out-of-State? Here’s How to Pick and Analyze a City

5. Can you trust the opinions of local professionals?

When gathering information about the neighborhood, you may get a different story from people who will benefit financially from your relationship, should you choose to purchase property in the area. Be careful about who you trust when soliciting information.

6. Have you seen the property in person?

Just like restaurant menus that feature too-perfect photos of food, pictures of out-of-state properties can be misleading, looking nothing like what you’re actually getting. Don’t skip taking a trip to visit the property in person.

Weigh Your Options and Make Your Choice

Because of the intricacies involved in out-of-state property investment, most investors agree that it can be a challenging strategy for beginners. So, if you’re a beginner and committed to buying out-of-state property because you’ve found a really great deal you can’t pass up, don’t be afraid to ask for advice from seasoned investors to help you with the learning curve.

Do you invest remotely? Why or why not?

Let me know your thoughts with a comment.

When you can buy a home elsewhere for the price of a down payment in your local market, you may consider out-of-state investing. Still, there are risks.