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How to Invest in Rental Properties Out-of-State

By Thomas O'Shaughnessy | September 27, 2022

Owning real estate is a worthwhile investment, but what happens when available properties in your area are out of your budget? If you live in a place like San Francisco, you're surrounded by some of the highest home prices in the country. Can you still own real estate as a way of investing? The answer is yes, but you have to think out of the box.

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Rental Properties

The key is to buy real estate in places that are more affordable, yet still have growing populations and promising home values. Let's take a look at the benefits and drawbacks of out-of-state investing, as well as some tips to help you do it successfully. 

Why Invest in Out-of-State Properties?

If you live in an area with high real estate prices, you may want to invest in out-of-state properties. This allows you to get into the business of real estate at a price point you’re more comfortable with.

Here are other reasons for considering this method of real estate investing:

  • Diversification: The best way to mitigate risk is to diversify. If one market in your portfolio sees a downturn or crash, you will likely benefit from having properties in other regions.
  • Tax benefits: Every state has different tax implications, and some are better than others. Owning property in a state with more allowable tax deductions or investor-friendly laws can help you achieve the best return on investment (ROI).   
  • Personal use: Perhaps you’re interested in eventually moving, or maybe you simply want a vacation home. Many people buy out-of-state rental properties in locations they enjoy to take advantage of favorable market conditions.

Challenges to Consider When Investing Out-of-State

Like anything in real estate investing, there are challenges to buying out-of-state rental properties. Perhaps the biggest hurdle is the initial investment of time. It always pays off to spend a significant amount of time researching the area you’re considering. 

In addition to looking at the real estate market, you’ll want to learn about school districts, amenities, and demographic details. It’s also essential to research local laws and regulations, especially once you narrow down your choices to a specific neighborhood. For instance, if you want to use the property as a short-term rental, you’ll need to make sure there aren’t ordinances or homeowners association (HOA) rules that would prevent this. 

You can browse online listings all day, but this will rarely give you all the information you need before buying a rental property in another state. To maximize your time and energy, partner with a realtor who has a deep understanding of the area. This is the best way to get accurate insight that will help you make a profitable purchase. 

What to Look for in Homes That Are Outside of Your State

First, choose a vibrant and promising market. You want to choose a city that has low unemployment rates, highly rated school districts, and safe neighborhoods. This is especially important if you’re buying a single-family home because your tenants will likely be a family. 

As you begin your search for a rental property, pay close attention to the condition of homes you’re browsing. While some people enjoy the challenge of a fixer-upper, it’s difficult to navigate this type of property from afar. You’re better positioned to receive a promising ROI when you purchase a house that is in good condition.

While you may eventually be managing the home from out-of-state, it helps to visit the area before committing to a property. If you can see individual homes and neighborhoods with your own eyes, you’ll be more confident in your investment. Work with a real estate agent to tour homes and increase your chances of finding great properties before they hit the market.  

How to Be a Successful Long-Distance Landlord

Managing rental properties remotely isn’t easy, but it’s certainly possible. Here’s how you can do it successfully.

Consider Hiring a Property Manager

When you’re managing a rental home from another state, it’s helpful to hire a local property management company. This is one of the best ways to ensure the house is taken care of and that your tenant’s needs are met. Many of these companies also assist in finding and screening potential tenants.

Although you will have to pay for these services, many investors will tell you that partnering with a reputable property management company is worth the price. After all, the time you save can be used to scout locations and plan for your next investment! 

Lean Into Technology and Automation

If you decide against paying a property manager, use technology and automation as much as possible. 

While searching for tenants, use online services that assist with gathering applications and screening applicants. Many of these programs also help with digital lease signatures and collecting deposits.

Software can also help you manage various aspects of rental management. Your tenants can set up automatic rent payments and even submit maintenance requests. 

Make Connections

When you’re not physically in the area, it’s important to have boots on the ground. Whether it’s a family member, friend, or even a real estate professional who provides hourly services. It’s helpful to have someone to call if you need something.

Keep a running list of reliable plumbers, HVAC companies, and other home service providers. This will allow you to send out a professional in a timely manner when your tenants have an issue. 

Perform Routine Inspections

Inspections are especially important when you’re managing a property from afar. This is a good way to ensure your tenants are taking care of the home and adhering to your policies. 

It also serves as an opportunity to identify maintenance issues and perform seasonal tune-ups to HVAC systems and other important amenities. 

Stay in Touch

Keep the lines of communication open for a successful tenant-landlord relationship. Don’t be afraid to check in from time to time with a friendly email or phone call. 

Likewise, your tenants should be aware of the best way to get in touch with you and how long it will take to get a response. It can also be helpful to set up a specific phone line for emergency issues.

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