Building a real estate empire takes time and money. In my case, both were limited when I decided to start investing in real estate. To solve these challenges, I looked at real estate investments out of town and got a business partner.
Investing out of state helped me find more affordable deals. Real estate in the Washington, D.C., area, where I’m based, is costly and competitive. Linking up with a partner helped me split the costs and responsibilities. Together, my partner and I located our first rental property a few states away and got to work building passive income through real estate.
There are plenty of reasons to invest in real estate out of state. This article will dive into a few. After reading, you’ll be able to decide if you’re ready to invest out of state, too.
Lower Prices and More Affordable Deals
If you live in a booming real estate market, as I do, you will understand how difficult it can be to buy your own home, let alone an investment property. With most banks wanting you to put at least 20%down for rental properties and prices ranging from $300,000 to over $600,000 for condos or single-family homes, the upfront costs can be substantial. Investing in real estate in Washington, D.C., Maryland or Virginia is not affordable for many, including me back then when I was getting started.
So when I decided to start investing in out of state rental properties, I looked for areas that were a two to three-hour drive or short flight away. I settled on a property in Philadelphia. At the time, Philadelphia was one of the best places to buy rental properties. You could purchase some rental properties for less than $50,000 and multi-units for as low as $100,000.
At the same time, rental rates in Philadelphia ranged from $1,000 a month or more. Most investors were able to get a full return on their money in three to five years from investing in out of state rental properties there. The numbers were outstanding, and the hurdles to get started were low. Once we found a local realtor, good neighborhood, contractor to do minor repairs, a local rental license, and a renter, we were all set.
Expand Your Real Estate Empire with New Deals
For some investors, the decision to invest out of state is a strategic one. They have taken advantage of the transitioning neighborhoods where they live and are now ready to expand their empire across state lines.
Out of state rental properties can diversify your real estate investment portfolio. Investing in other states gives you geographical diversity. This can help protect your portfolio since all your real estate investments won’t be in the same place. Imagine if one company is the primary business in your hometown and that company decides to leave or relocate overseas.
When a town is centered around one company, that company’s decision to leave could result in the loss of valuable jobs and income for your area. As a result, anyone who lost their job would suddenly have to find a new job locally or leave to find a better job elsewhere. Then the real estate values and average rents could drop since the number of homes available exceeds demand. A decline in the real estate market would hurt your investment returns.
When you are invested in out of state rental properties in different markets you have diversification. Even if your hometown market is down, your out of state rental properties could be up. Your now more profitable out of state rental properties could be the source of income that keeps you afloat until your hometown real estate market rebounds.
Out of town rental properties could also help you learn about other investment opportunities. For example, you may begin investing in another state for rental properties. However, what if the real estate agent who helped you find the out of state rental properties finds good commercial real estate deals, too? You could find yourself expanding your real estate portfolio to include commercial real estate or other opportunities like fix and flips.
Purchasing commercial property would increase and diversify your portfolio and real estate experience. Furthermore, since you are in a more affordable market, you may be able to purchase more real estate investments, which increases your wealth and portfolio as a whole.
Buy a Vacation or Retirement Home
I work and live in a city where I can earn a high income for my skills and experience. However, my career is most relevant in Washington, D.C., and there aren’t a lot of jobs like it elsewhere. So, I’ll probably spend most of my career here unless I pivot to something else.
My husband and I often discuss relocating in retirement to get the most bang for our retirement bucks. Therefore, I have explored buying a home out of state for our retirement home. Our goal is to buy the house now, while we are working and have great access to credit and cash flow, and have a fully paid off house ready for our retirement. Furthermore, if we invested in our retirement home now, we could find a tenant who could pay the mortgage off before we retire.
If we could use our retirement savings in an area that costs half as much for the same expenses, we could guarantee we don’t run out of money in retirement. We would have more than enough money for ourselves and enough to build generational wealth and give our kids a head start.
Alternatively, if you like to vacation as much as I do, think about your favorite vacation destination. If you have visited the same place more than a couple of times, maybe that’s where you should buy a vacation home. You can use it for your family a few weeks or months out of the year. Then, whenever the home is unoccupied, you could rent it to visitors through short term leases or by using websites like Homeaway or Airbnb. Income generated from visitors renting out your home for their vacations could keep your vacation home’s costs down and ensure it’s used throughout the year. Plus, the profits from your vacation home are an additional stream of passive income.
Letting Someone Else Find & Operate Your Out of State Rental Properties
If you prefer to invest in out of state rental properties that require fewer repairs before renting, you should consider turnkey properties. A turnkey property is a home or apartment that is fully renovated and ready to rent. And in some cases, the property is already rented to someone under a lease, so you get to start off with a tenant and cash flow.
There are hundreds of companies across the U.S. that locate, maintain and sell turnkey rental properties professionally. They are based in growing and well-known real estate markets. The company does all the legwork and then sells their homes to real estate investors. They will purchase the property, complete any renovations, find a tenant and engage a property management company. All you need to do is buy the property and collect rent. I have not personally purchased a turnkey investment, but I have considered it. If you are new to investing or want less hands-on work, this might be the right move for you.
Find Better Markets with Higher Returns
No one can argue that the reason to invest in rental properties and real estate is to make a return on your investment. However, some markets are much easier to turn a profit than others. If your local area has a bad price-to-rent ratio or low rental demand, it could be time to invest outside of your state.
Out of state investment deals can yield better price-to-rent ratios and may have better rental properties available. Both of these factors can mean a higher return on your investment. Before you buy an out of state rental property, compare what you find in your market research to what’s available in your state. Use this guide to help you determine the best cities for you to invest in out of state.
Also, before you get started, research areas where there is a high demand for rental properties and calculate your potential return on your investment. If you have the money, you may even look into multi-units to expand your profit margins.
Another reason to go out of state could be for access to more neighborhoods in transition. Following the housing boom, Detroit and Las Vegas were cities where a lot of investors started exploring. For one, they could purchase beautiful homes, renovate for little, and wait for the neighborhoods to bounce back. In the meantime, these properties were rentals until the market started to improve.
Take The First Step and Find a Property
If any of these reasons to invest in out of state real estate appeal to you, go for it. Do your due diligence to ensure you are financially ready, know the landlord laws, local licensing rules, and other important factors of the other state, and build your network and resources there so you can navigate when problems come up.
Getting to know a local realtor and other investors can also help you along your journey. The realtor should know the area well and work with seasoned real estate investors, renters and homeowners. If a realtor is outstanding, they can sell you an investment property and get it rented for you, too. Check out real estate investing forums and websites to help you find investment opportunities too.
Since the property could be a drive or flight away, decide if you want to invest in a property manager or manage the property yourself. Option one will cut into your overall profit so it’s crucial to figure out your budget and estimated expenses first. That’s the only way to calculate your ROI accurately.
Do you have any other advice about investing in out of state real estate that you want to share with the Wealth Noir community? Leave a comment and engage with the community.
Acquania Escarne is the creator of The Purpose of Money, a community of women building generational wealth for their families one dollar at a time. As an entrepreneur, real estate investor, and licensed insurance agent, Acquania has always been passionate about financial literacy. On her website, Acquania blogs about ways to help you improve your money habits, create wealth, and invest in real estate. Follow Acquania on social media for daily tips.