By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
Multi-State Investing: 4 Reasons Why and 7 Steps How to Invest in Multiple Zip Codes
By Yumna Zahidi
It’s true—real estate trends vary market to market, across the map. And it’s no secret that buying and managing property can be challenging in multiple zip codes. But many experienced investors recognize the potential for higher returns by finding and investing in properties outside of a single market. Of course, when you add a few out-of-market or out-of-state properties to the mix, you will face a slew of new obstacles.
Nevertheless, investing in property beyond your own borders can provide investors with greater access to a wealth of untapped, growing markets and the ability to better diversify their portfolio.
If you haven’t thought about this before, here are four compelling reasons why you should consider investing out of state:
Buying in different states can generate extra savings, especially when you pinpoint cities with affluent markets and lower property costs. When you live in a city with inflated property values and you are eager to build your portfolio, it is helpful to look at areas with properties that won’t eat away at most of your net worth.
When you invest in states with very low tax rates, such as Louisiana or Alabama for example, you are looking at a multitude of potential savings. Stepping outside of the higher priced market you may reside in and tapping into various locations across the U.S. gives you the opportunity to become a more rounded investor.
Assuming you follow all our tips on multi-state investing, diversifying your portfolio has the additional benefit of reducing your risk. Imagine how your finances would be impacted if a hurricane were to damage all your investment properties at once? It is reassuring to know that you can rely on income from other properties if one market faces challenges or is underperforming.
Tying your properties to multiple market cycles protects you from volatility over time. This can better protect investors from market downturns or socioeconomic factors that can lower property values and increase maintenance costs. You can also have the choice of selling a low-yielding property to help pay off debt on your other investments.
3. Exposure to New Markets
Investing in out-of-state rental properties exposes you to dynamic rental markets, ultimately leading to a wider range of opportunities to generate more rental income. By diversifying your rental portfolio, you can increase your chances of coming across up-and-coming markets.
Good indicators of such action: Companies moving their headquarters to an area, a decrease in average days on the market, or a surge in job and population growth. If you can identify an emerging market early on, you can get ahead in securing your stakes in a booming market way before other investors.
4. Maximize Demand
Another reason to become a multi-state investor is the rising demand for rental units amongst certain population groups. Take millennials, for instance—many of them are looking to rent instead of buy due to a variety of reasons, such as paying off student loans, or a desire to test different markets for work and lifestyle instead of becoming a “static” homeowner like previous generations. If this is your target audience, consider one of the many cities that serve as a hub to millennials.
In addition, areas with transient populations, such as college towns or military bases, can also provide an enormous demand for rental property. You can pick and choose from areas with mid-level rent rates or high-end rates by doing some research into the population scope and property demand groups for which you are aiming.
Steps to Multi-State Investing
If you are new to multi-state investing, here are seven simple steps that will help you get started:
1. Choose the market
If you’re convinced this is the strategy for you, it’s important to do your research before investing in any property. Choosing a market is going to be your first step. Towns with which you are familiar are good places to start–somewhere you grew up or went to college, for example.
Try to also explore areas that hold similarities to these familiar towns. In doing so, you’ll know what you are dealing with in terms of climate, demographics, property age, etc., and you won’t run into any surprises further along the process.
2. Visit the property
Making an in-person visit before purchase is a must, as online information may be incorrect. Like they say, you can’t believe everything you see on the internet. Visiting the area can also help you to get acquainted with local professionals who will likely be involved in the sale, such as lawyers, real estate agents, lenders, etc.
3. Stay current
Staying up to date on things like market conditions and laws that govern the state are crucial to the success you will have in becoming an out-of-state investor. We are lucky to live in a time of so many technological resources, such as Investopedia.com, Zillow.com, and Realtor.com
Also check out this article by CoreVest’s Dan Federico on apps that can aid in real estate investing. Looking up legal forms required for certain states also falls in line with the due diligence that should be done when acquiring property in an unfamiliar area.
4. Leverage Your Network
Above all else, the best resource will always be your network. Reach out to investors who are experienced in the multi-state game and get tips on how they manage their out-of-state investments. Get involved on forums or discussion pages on websites such as BiggerPockets.com.
Schedule some time to attend conferences in the areas that interest you to get a firsthand impression on local professionals and what they have to offer. Remember, the people and businesses with whom you network will always have better information based on real experience and understanding of the market you are entering.
5. Stay Organized
Organization is crucial in keeping track of the many functions of maintaining your property and keeping things in order. From making mortgage payments and paying property taxes to screening tenants and maintaining your property, there is a lot that goes into the upkeep and responsibilities associated with a property. Checking up on your investment is important and getting updates can become difficult when your assets are far from reach.
It is important to make sure you have a proper system in place so you are aware of all things occurring at your property—whether you are physically present or not. The more properties you get under your belt, the harder it will be to keep track of them. Hiring professionals to do the supervising and management can give you more time to focus on acquiring new properties and improving your investment strategies.
6. Hire Professionals
Property management can take on the responsibility of screening tenants, collecting deposits and rent, paying utilities, and many other tasks. As you take on more and more assets, property managers can look after your investments and keep a closer eye than you could from hundreds of miles away. A local landlord can keep in touch with tenants and how they are treating the property, as well as pressure them for any delinquent payments.
Hiring handymen that are local and consistent between your homes will allow someone to become readily available if an issue presents itself. This can minimize the stress of looking for someone new and having to research rates every time normal wear and tear is suffered on your property. Property management will also be able to bring existing relationships with vendors, maintenance workers and contractors to the table to lock in the best rates.
7. Master Budgeting
This idea seems fairly obvious but making sure your properties can achieve a positive cash flow is crucial to your success in investing. If you don’t map out a plan with spending limitations set in place, it can be very easy to get caught up in a high expense load that does not support your income.
Take the time to figure out your projected capital and how you wish to allocate your expenditure before you start acquiring, hiring, and rehabbing. You also want to keep track of other fixed costs that could be overlooked, such as travel costs associated with checking up on properties, property management wages, HOA fees, etc.
Go Forth and Conquer
Investing in property out of state may seem like a tricky game, but once mastered, it can boost your portfolio and revenue. Crossing your home state border can deliver affordability, lowered risk, access to new markets, and the ability to follow demand and leverage a new investment strategy that is bound to boost your investing experience and prowess.
Once you have decided this is the move for you, arm yourself by doing research, getting organized, budgeting, and hiring professionals. If you have what it takes to become a multi-state investor or you have any more questions on how to grow your rehab or rental business, please call Yumna Zahidi at 949.763.3162 or email email@example.com.