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

by | BiggerPockets.com

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.

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.

free-mentor

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.

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

3 Comments

  1. Lisa Phillips

    Interesting. I teach people about investing all the time, so most of what is written is accounted for and a system in place to deal with it, although some of the items (ie. vacancy rates) are not a big factor because there are other metrics you look into that are more important that will let you know what the vacancy rate is better than the actual vacancy rate is 🙂 anyways, this is the only option for many investors, and the only way i’ve been able to get started. But questions to ask – find a system, or someone with a system, to make sure you DO know what to look for and works before committing. For that, great article.

  2. Shawn Ginder

    Living in Europe, 2016 bought 3 properties in PA, in 2017 under contract to buy our 4th property in PA. Did all negotiations, due diligence and financing remotely. It can be done! In 2016 I did walk the properties before signing our first deals, in 2017 we will walk the property before signing, but have the confidence after doing our first deals if I needed to would be comfortable to sign sight unseen. Having trusted people on the ground, a good property manager in place, and using a trusted home inspector mitigates the risks. All this done as a beginner, but have done research, and sought advice from seasoned investors.

  3. First of all, I personally think that you didn’t emphasize the importance of hiring a tax professional enough. The complex of the multiple-state property management is at a high level, and you’d most probably lose way too much money without hiring a tax professional.
    Regarding the rest of the article, I couldn’t agree with you more! You highlighted the obvious stuff but also the stuff that many people would probably forget about. Nice one.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here