By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
By Jack Jerue
Purchasing an investment property isn’t a simple process as most investors would like. When the property is outside of one’s local market, the challenges often increase. However, despite these obstacles, real estate investors shouldn’t limit their search to just one market. It is generally helpful to study the trends of different markets to be a more informed investor. In addition, investing locally may not be the best option due to limited supply and rising prices, especially in high-density urban metros. In these cases, looking outside of one’s local market can be a great strategy if executed properly.
Benefits of Investing Out of State
1. Pursuing Your Rental Strategy
There are numerous trains of thought when it comes to the “best” real estate investing strategy, but the reality is individuals have different investment horizons, risk tolerances, and approaches to the market. Whether investors target long-term appreciation, inexpensive fix and flip opportunities, or strictly cash flow, the specific opportunity may not exist in their local market. Investing in different markets provides opportunities that fit each real estate investor’s strategy.
As with all investments, diversification is a great way to limit risk. It is no different in real estate. Diversifying a rental portfolio by investing in numerous geographic locations allows investors to “bet” on up-and-coming markets, hedge on their bets, target multiple investment strategies at once, and absorb demand shocks where other properties are held (think New York in the third quarter of 2020).
Markets across the country vary greatly in average home value. Investors that live in high-cost cities may not be able to afford a primary, let alone an investment property in their local market. In 2020, the average home value in San Francisco was north of $1.5 million (as reported by multiple sources), compared to the average home price in Indianapolis of $150 thousand. An investor living in San Francisco, for example, could afford multiple rental properties in an out of state market before being able to save enough equity to purchase a single rental in their own market. Targeting cities with lower barriers to entry presents more opportunities to real estate investors.
Risks Involved with Out of State Investing
1. Identifying the Right Property
You have narrowed your search down to a specific market, now what? With digital platforms like Zillow and Redfin, out of state investors will sometimes purchase a property without seeing it in person. But even with photographs of the property and an inspection report, significant problems with the home can go unnoticed. Many choose to seek a local agent for help, but even an agent can mislead a buyer. Purchasing a property out of state can present problems for buyers that are unable to perform proper due diligence prior to purchasing.
2. Distance from Property
The most obvious challenge in purchasing out of state is the physical distance from the asset itself. If an investor chooses to self-manage the property, extra time and money will need to be set aside. Out of state self-managers will need to plan periodic trips to the property, collect rent, communicate with contractors and more. Time is valuable, and significant time spent on self-management can lead to loss of focus or money elsewhere. Real estate investors may find it difficult to find a property management company that they can solely rely upon; not to mention paying 7-10% of the gross income to that company.
Keys to Executing Out of State Investing
1. Selecting Property Management
One of the most important factors in investing out of state is finding an excellent property management company. There are many property managers in each market, but some will help investors better maximize their out of state investments. These ideal management companies will have connections to contractors, keep the property leased, schedule inspections, and much more. Out of state investors who choose to self-manage will eliminate the trust factor, but they may spend more time and perhaps money than if they were to hire a property management company in the first place. In addition, a professional management company may help save investors money in the long run by avoiding problems that could lead to litigation, vacancies and damages.
2. Finding a Local Agent
Real estate is hot in many markets right now. By the time a property reaches Zillow, it may already have multiple offers, often all-cash and above asking price. Searching online for the right deal is often too difficult in this market. Finding the right real estate agent can save investors significant time, stress, and money in the buying process. Agents can guide buyers to the best neighborhoods, present off-market deals, run past sales comparables, and provide input on specific concerns with a property.
3. Obtain Pre-Approval
Before considering buying a property, find a lender that can provide a pre-approval letter for a property in your desired price range. As previously mentioned, properties are being purchased quickly, with all-cash or high-equity and existing financing in place. The difference between having an offer accepted versus rejected can come down to the bid plus whether the buyer makes an offer with financing already in place. This is why it is important to explore all financing options; local banks, credit unions, or national private lenders who solely focus on investment properties such as CoreVest, before choosing the best one for your situation and purchasing the property.
With the help of a reliable property management team, a trusted local realtor, and the most suitable financing in place, out of state real estate investing can be a rewarding and lucrative strategy. Some of the most successful real estate investors have chosen to invest in markets outside of where they reside, and this trend should continue, especially as new technology makes the process even easier.