Real estate investment is one of the most profitable industries in the current market. Those who invest in real estate the right way are able to turn their funds into fortunes. In fact, 90% of millionaires in the world got their money by investing in real estate. When you’re just starting to get involved with the world of real estate investment and real estate business management, the initial steps can feel a little financially overwhelming – after all, the first step is a monetarily large one (which can potentially get larger depending on the location, size, and quality of your first property). It’s important to take certain questions, considerations, and strategies into mind when you’re looking into property investment.
This article is primarily focused on the question: when conducting real estate business, is it a good idea to buy properties out of state? The answer to this question depends on a few different factors. Generally, there are a lot of profitable real estate businesses that conduct out-of-state purchases and income properties, but these businesses often come with a multitude of other components that make out of state purchasing possible. For the sake of clarity, this article will go factor-by-factor to determine what will influence your decision and ability to buy property out of state
What Are the Benefits?
The benefits of this business strategy are numerous, and they’re worth going over before covering all the moving parts. A few benefits of buying properties out of state are detailed below.
Sometimes, buying properties out of state saves you a lot of money. This is the largest benefit of buying out of state property. Let’s say you’re living in New York City, and you want to start growing your real estate investment. You’d be rolling poorly weighted dice to try and buy property in New York City. Even if the property tax rates are low, the price of property is so outrageously high that unless you had a large financial backing to support your business buying locally, it just isn’t a viable option. Much of the time (combining lower property costs and lower property tax rates), buying out of state property can get you a much larger return on investment.
Running your business in different locations makes for beneficial exposure to a multitude of different market advancements. When you branch out with real estate, you’ll be able to get your hands in as many different markets as you’re able to. All over the country, there are growing real estate markets in numerous Florida cities (Orlando and Tampa, to name a few), western cities like Las Vegas and Tucson, and a multitude of cities and towns pattered around the United States. When you buy property out of state, you expose yourself to growing markets and establish your ability to compete in them.
Branching out to different states allows you to build a reputation and a portfolio. When you expand your business out of state, you now have the ability to network with other businesses and connect with many different demographics and customer bases.
The pros of investing in out of state property have to be looked at contextually. What is your situation as a property investor? Are you attempting to grow a company centered around cultivating rental properties? Are you interested in being a landlord of various rental properties without venturing too far into the business world? Are you trying to establish a turnkey rental to make some extra passive income? All of these are common reasons that buyers invest on out of state property, and all are common methods of making money.
Make sure that you accurately assess your situation – figure out which pros and cons apply to you directly and understand which of the benefits of out of state property ownership will impact you the most. Every investor is different.
What Are the Drawbacks?
Now that we’ve covered several of the reasons that out of state properties can offer up beneficial results, let’s take a look at some of the drawbacks and obstacles associated with these investments.
You won’t always be around your property. The more out of state properties you have, the more time consuming it becomes to visit your properties. As a property owner, you’ll obviously need a property manager for out of state purchases, and the property managers that you hire will have to be top-notch. You’ll have to check in on your property every now and again, which may involve long commutes.
Tax complications. As a property investor, you’ll likely accumulate out of state properties in order to use them as income properties (rentals). This means that you’ll be earning income in more than one state, therefore complicating your experience with taxes and needing to take additional steps in order to keep all your boxes ticked.
Sometimes complicated laws and regulations. Before purchasing property across state lines, make sure you look into the laws of each individual city and state where you’re placing your income property.
Owning out of state property can be a very difficult undertaking. The experience you have with buying these properties is largely reliant on the staff that you acquire, the location that you select, and the individual properties. Make sure that your decisions are informed and carefully coordinated when it comes to buying properties out of state – you need to make sure all moving parts are in order and that everything goes as planned for your property.
The Moving Parts of Buying Properties Out of State
When weighing the pros and cons of buying property, your main focus should be on maximizing return on investment. I’d say that the main reason most people invest in out of state property, and the reason you’ll want to consider doing it too, is because it allows for a huge ROI and therefore a large profit.
Let’s begin by expanding a bit on ROI in the context of property investment, as it’s imperative you internalize its necessity and the science behind it. When you buy an out of state property, you’re making a property investment. With property, ROI is profitability ratio, and can give you a percentage of profit.
The formula for ROI is [ROI = (Investment gain – investment cost)/(investment cost)]
In shorthand, it’s R=(G-E)/C
Here’s what each of those factors mean: R is your return on investment, or how large of a percentage of the cost that you’ve profited off of your property. It’s the percentage of profit in terms of cost. C the initial amount of money that you spent on the property. G represents the money that you collected. As a property investor, it’s a number to represent how much you made in rent payments, for example. E refers to the recurring expenses that happen within the allotted time that you’re trying to calculate the ROI.
Let’s say you bought a property, and you want to calculate your return on investment for one year.
All things included (property price, closing costs, remodeling, fees), it cost $50 (yes, I know it would never cost that much, but for the sake of simplicity, let’s just pretend that we live in a property utopia where the transaction would cost you $50). So, you’d input 50 as the value for C, or C=50.
In that year, you accumulated utility bills that added up to $5. So, you’d input that number for E, effectively making it E=5.
You collected rent payments from your tenants that added up to $15. That’s the value you’d put in for G, making it G=15.
Now that we have all values for all factors, we can calculate ROI. Your formula would look like this: R=(15-5)/50. This would give you the value R=.2, or 20%.
This is only a very simple method for calculating ROI – the general goal of this section is to try and explain ROI in mathematical terms. You can find some extremely good ROI calculators and explanations here (this formula can have a lot more components and factors when you’re dealing with mortgages and long-term loans – I’d have to devote the entire article to explaining ROI if I went too far in-depth).
Now that we’ve covered ROI on property investment, let’s talk about property managers.
A property manager (as you may or may not know, depending on whether or not you’re seasoned in real estate investing), makes sure that your rental properties are running as they should be. They’ll manage rent, bring in new tenants, stay on top of maintenance, and carry out other property-related responsibilities. When it comes to out of state property, it is absolutely essential to make sure you find a good one.
If you find a suitable property manager or property management company to take care of your property in your absence, you’ll be saving yourself money, stress, and time. The difficulty in finding competent property management comes in when dealing with logistics of out of state property. It can be difficult to trust someone with a valuable asset like property, but not impossible. Here are some ways you can find a decent property manager without falling victim to analysis paralysis looking for one.
- Normally, it’s a good idea to refer to your network when looking for property management. However, when you’re entering new markets and new locations, you may not have a network expansive enough to rely on recommendations for property management. If you’re able to buy property somewhere out of state while retaining your ability to use your network to find a property management, this is an ideal option (so long as the recommendations are reliable).
- The internet. Looking for property management online can be a bit of a double-edged sword – you want to use all the resources possible for acquiring property management, but don’t want to end up with a poorly screened property manager. In order to make sure you find a good property manager on the internet, make sure to check their reviews. A huge upside to finding a property manager online is that you’ll have the ability to cross-reference many different companies in order to figure out which one is best suited for your particular property. Vet their websites and Facebook pages.
- Asking the right questions to your candidates. When screening property managers, you’ll want to make sure that the one you find is experienced, professional, and ultra-competent. Here are some questions to ask your prospective property managers:
- Where do you advertise listings?
- How long does it take you to house a new tenant?
- What kind of vacancies do you specialize in?
- What kind of vacancies do you currently manage?
- Do you have a maintenance team?
- How long has your company been around?
- Make sure they have a team with different departments. Scam alert: you don’t want one person doing everything. Hire an entire management company. If you have a candidate who claims to be able to do everything by themselves, you’re in for a whole lot of trouble. You want a management company that uses teamwork to manage and maintain properties – that way, things get done much more efficiently with full accountability.
- Visit properties your candidates manage. This is a really effective way to see a property manager’s work in action. Check to see that their facilities are up to date, clean, house happy tenants, and offer up an overall positive quality of life.
Property managers can mean the difference between make and break. Screen your property managers and make sure you’ve found the best one that you possibly can in the location where you’re buying property.
Now that we’ve covered ROI and the importance of property managers, let’s also cover one super important topic: understanding the laws of the cities where you’re buying property.
Tax laws can be extensive, complicated, and extremely annoying (not to mention scary – if you follow tax laws, things are guaranteed to turn out terrible for you). Additionally, legal nuances can sometimes feel restricting and very hidden. For example, you don’t want to accidentally buy a turnkey vacation property somewhere that homeowner’s associations have regulated vacation rentals. You don’t want to find out too late that the state your property is located in charges income tax for income properties.
I think a general rule of thumb to observe before buying properties out of state is this: consult a legal team before doing so. Don’t try to figure out on your own what the tax and property laws are – leave it to a professional.
It’s important, also, to go over LLCs. Basically, a Limited Liability Company (LLC) is a company dedicated to making sure that your personal assets are not undergoing too much risk at the hands of your business. In the context of property investing, an LLC can be very important for financially protecting your property against debt, bankruptcy, and lawsuits – they’ll make sure that in any of these situations, you’re not using your own personal money to pay debts.
Though you do not necessarily need an LLC to invest in property, having one can mean the difference between bankruptcy (and therefore having to sell your assets) and skidding gracefully over road bumps to continue your business venture. When you invest in property (especially across state lines, where you won’t always be supervising it), your risk factor is cut into a third by using an LLC. Let me list two specific benefits of an LLC below:
- Simplified taxation, and therefore, simplified life. An LLC passes income and capital gains, income, expenses, and other costs directly to the owner, thereby getting you liability protection and saving you the trouble of having to file taxes twice.
- The safety of your personal bank account. LLCs make sure that you don’t use personal money for business transactions that come up in a liability setting. You’re not able to be sued for a wrongdoing of the business. Remember – you can’t set up an LLC once you’ve been sued. Make sure that you do it beforehand.
It’s incredibly inexpensive to start an LLC ($100, more or less). With just a tiny amount of money, you can wind up saving yourself a fortune down the road. Don’t ignore the possible (and sometimes probable) risks that come with buying out of state property (or any property, really).
With an LLC, even though you already have a significant amount of financial protection against liability and risk, it’s still important to get liability insurance for your LLC. As an out-of-state property owner, you need to be taking as many different precautions as possible when it comes to protecting you and your property from risks.
One final point to this section is probably the most important: the market. It is absolutely, non-negotiably essential that you know your market.
There are a few relevant components of your market worth explanation when buying out of state. Firstly, you have to understand how many people are participating in this market, and how that population of people drives the market. When buying property out of state (if you want to maximize your ROI), make sure to know two things about your market population:
- The size of that population.
- The expected growth of that population.
When you have a town with a growing economy and a growing population, you’ve struck real estate gold. You want to make sure that the place you’re buying property in has a relatively small amount of people (that is, it isn’t a huge city where property values are through the roof), with new movers coming in every year at a steadily growing pace. This means that you can make sure the property value is low when you get it, and that will continue to exponentially appreciate in value every year.
Ideally, you want to pay small and receive big. You don’t want to spend your money in a place that doesn’t have a growing population, or has a market too small or economically depressed for people to participate in.
Tips for Buying Properties Out of State
Buying out of state properties, should you decide to do it, is intimidating without a compass or a plan. But if done correctly, it’s a likely source of profit! Make sure that, above all, you conduct business smartly. Here are some ways that you can make sure you’re playing it safe and acting with your ROI in mind.
Have a team. When you start to gain traction in your property investments, this will mainly just happen organically. When you start investing in property and buying out of state, you’re going to need property managers (as previously talked about). You’re going to need to find the right contractors. You are not going to be able to buy and maintain out of state property all by yourself – you need to build a team of people that you trust and value the presence and advice of.
Get your properties inspected before you close the sale. I’m going to paint a horrifying picture in your mind: you buy a large house with the purpose of renting it out in small condos. When you see the property, everything looks great – the appliances are up to date, the location is perfect, the price is low, and you have a genuine market to get tenants. You seal the deal, buy the property, and start getting to work. And then, just as you’re beginning to renovate, your contractor tells you that the walls are infected with mold and some seriously expensive work needs to be done to get it out. This is a situation that could have been totally remedied by having the property inspected before you closed the sale – inspectors will make sure to find anything wrong with the property and let you know before it becomes an expensive issue. Not only this, but an inspector can hand you a laundry list of things that your property will need to fix – this gives you a roadmap for the renovation of your new property.
Choose your location carefully. You want to make money. That’s the whole point of property investing (which, by the way, will absolutely make you money if done correctly). Don’t pick a town to buy in purely because you think that town is cute. Don’t pick the location based on factors that have nothing to do with your ability to make money. Make sure you look at your data, look at your numbers, and make a decision based on them. From there, you can start to focus on marketing and location value – just make sure you’re picking a market that will give you cash flow. Compare many different towns – don’t marry yourself to one town and try to strategize a million different ways that your real estate investment could possibly work. Figure out in a legitimate way how you can make it work.
The internet is your friend. Use it. There are so many website focused on property and location data that you can be using to ensure that your needs for statistics and demographic analysis are satisfied – Trulia, Zillow, and PropertyShark are only a few places you can go to get data. Additionally, you can always use the internet to find valuable resources for property managers, real estate agencies, and contractors.
Make sure you know the neighborhood and town the you’re buying in. Location is the bread and butter of real estate. Know the neighborhood statistics and know what you’re looking for in location. Show up in person to your locations and make sure that you get a feel for the community (which will, ultimately, be your market). Compare many different cities and towns
Meet every one of your staff members in person. You want to know who these people are, what they’re like, why they’re qualified, and how good of a job they’re going to do taking care of your investments.
Set up a system. Part of your process in any real estate venture should involve setting up a system. Your network, business strategy, staffing, and marketing are all going to be part of this system. You can’t do your business by yourself, and you can’t do it without a plan.
What You Shouldn’t Do
Don’t sacrifice your ROI. Sure, you want your property to be a high quality one. You want to make sure that you have everything you need to make your property investment a truly unique, amazing, first-class property. However, when you go about your business buying and updating the property, make sure you’re staying loyal to a maximum possible ROI.
Don’t drown yourself in research. The business process is one that, fundamentally, begins with action. Many people (especially when it comes to buying property) get trapped in staring at constant listings and figuring out which properties they should buy in which locations. While it’s obviously good to research your purchases before you make them, make sure you don’t fall victim to the monsters that overthinking and overanalyzing are.
Don’t make snap-decisions when buying property. This point is the polar opposite issue to the previous one. Of course, you don’t want to overthink your property investments. But you do what to do enough research, talk to enough people, and understand enough about what you’re doing. You need to make sure that your decision to buy property is the right one!
Buy property in a famous, metropolitan city. Listen, your decision to buy property is really up to you. If you have enough money and enough resources to be able to establish rental properties in a place like New York City or Los Angeles, be my guest! However, if you’re just beginning to consider and look into the options surrounding out of state property investments, chances are that you’re right at the beginning of your property investment journey. When you start up, it is absolutely imperative that you maximize profits. You want to look for a growing population and economy, not a well-known city where property values are totally through the roof. Do your research and make a data-driven purchase before you start looking into expensive cities.
Is Purchasing Out of State Property Right for You?
Investing in real estate is, without a doubt, a full-time job. It involves looking at and analyzing numbers, as well as hiring the right people to be part of your team and making sure that you’re getting the largest return on investment as possible. Investing in any location involves these factors – property investment can be a tricky thing to start out with. However, making sure that you’re running a profitable asset out of state demands a higher rate of attention to detail.
If you decide to invest in out of state property, you’ll have to make sure that you go about it cautiously and with a calculated strategy. Don’t expect things to work out because you want them to – with real estate investment, you have to make these things work.
Here’s the bottom line: if you live in a state where real estate is expensive and property tax rates are high, you should consider buying property out of state – it’s much more lucrative to buy rental properties in a city like Charlotte, North Carolina than it is to buy rental properties a city like New York City. When you’re looking to buy out of state, consider what state you currently live in. Your goal as a real estate investor is to increase your ROI and pay the least amount of money for the largest profit.
Many people decide to go the route of real estate when looking into ways to increase their assets and bank accounts. When investing out of state, make sure that you follow the guidelines as laid out in this article as well as conducting your own research and following your own leads. If you stay focused on your return on investments, quality of property management, and the overall location of the rental itself, you’re setting yourself up for a successful business venture in the realm of real estate investment.