Buying a Rental Property Out of State: A Golden Opportunity for Investors
The Primary rental markets in the US have now become more and more expensive. A migration trend can be seen in such markets from the standpoint of both the renters and the investors[1]. Being an investor, it is no better time than this to look for new opportunities in the emerging secondary markets. Certainly, you should consider buying a rental property out of state in such growing real estate markets.
Buying a Rental Property out of State can be a lucrative option for a careful investor. You can expect better market conditions and high returns on your money by investing in these out of state markets.
When should you consider Buying a Rental Property out of State?
The idea of investing locally may be a great and comforting deed for investors. But, sure it is not always viable and you may have a different case from other investors. You might live in a state where the prices of real estate have been skyrocketed. You think your money can generate better returns if invested in the new secondary markets. And now it doesn’t make sense to you to buy an investment property in a primary overheated market.
Reasons to consider buying a rental property out of state
- Cheaper Real Estate (An Average Property in NYC costs $649,000 Whereas, in Phoenix, it costs around $261,000). [2][3]
- High Rental Demand
- High Rental yield (Phoenix has seen a 10% increase in rent Y/Y whereas Manhattan sees only 2% )[4][5]
- Low Tax State
- Low Home Insurance rate (NYC Homeowners pay about $1300 Yearly whereas Phoenix has $810)[6]
- Increasing Population Growth Rate (Phoenix, Poise, and Charleston will see a 1.6% faster population growth rate in 5 years as compared to 0.2% growth rate in NYC, Los Angeles, and Chicago)[7]
So, if you are considering buying a rental property out of state, having these indicators increase the probability of the profitability of your rental business
- Occupancy is increasing two times as fast
- New Jobs have been Created twice faster
- The cost of living index is still at par with National Average
- Property is appreciating 50% faster
- Rental Yield has also grown 20% more
How to Buy Rental Property Out of State?
Owning a rental property in another state is a good idea considering the present market trends. But deciding to do it is one thing and working on the strategy is another. If you are keen on buying a rental property out of state, you must follow this exact strategy to ensure a profitable rental business.
A profitable rental business depends upon having positive cash flow. There are a lot of things that determine your cash flow from the property. Finding a correct prized property at the right location with an 8%-9% rental yield [8] is what is needed to maintain and run a profitable rental business. The other block to this puzzle is to have boots on the ground, a strong team that can look for your property when you buy and rent out of state.
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Searching a Rental Property Out of State
When you are searching for a rental property out of state, you should keep a close eye on the secondary rental markets in which the economy is growing at a fast pace. There are 50 states in the US. Out of which, the secondary markets in the US that you must put your attention to include
- Texas (Austin, Houston, Dallas, San Antonio, Fort Worth)
- Florida (Orlando, Miami, Jacksonville, Tampa, St. Petersburg)
- California (Riverside, San Jose, San Diego)
- North Carolina (Charlotte, Durham, Raleigh)
- South Carolina (Charleston)
- Arizona (Phoenix)
- Idaho (Boise)
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Understand State Laws for out of state property
You are very well educated about the laws in your state. But not knowing about the laws in other states when buying a rental property out of state can break your business. You don’t want to occur in a situation when a tenant can sue you. Get yourself familiar with the landlord and tenant laws, renters’ rights, landlord retaliation and rent laws of the particular state before you invest in an out of state property.
Hence, you should narrow down to an out of state property after getting familiar with the laws of that state. And if it is needed, you can consult a lawyer before finalizing the deal. Nolo is a great resource to understand all the state laws and local laws surrounding a rental business in a specific state.
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Get Acquainted with the Tax Laws for buying a property out of State
Taxes become a little complicated to understand when you own a rental property in a different state than you live. It may be complicated but you have to anyway understand it and pay them as needed per the law. The rental income you get is subjected to both state and federal taxes.
Some states only require you to pay taxes to the state where your rental property is located. In some states, you are required to not only pay taxes to other states but also report the same in your own state return. Most states allow the credit of your taxes that you have paid to a different state. It is also interesting to note that not all the states of the US have the same taxation criteria.
There are nine states in the US that have no individual income tax. Eight states in the US have a flat rate on income tax. Some states even collect local income tax along with State Income tax. So, it becomes important that you get acquainted with tax laws first hand when buying a rental property out of state. It is only after understanding taxation, you can estimate your rental profits clearly[9].
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Do you need a Mortgage?
Getting a mortgage to buy a rental property is a great way to invest in real estate. But if you are considering buying a rental property out of state, the pace of approvals can take a longer time than usual. Most lenders allow mortgage on out of state property but it will be a better idea to get pre-approved.
If you are having trouble securing a mortgage the traditional way, there are lots of financing options available for investors today. You can even go with private hard money lenders as they are more concerned about your credentials and the returns your property can make rather than where the property is actually located.
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Run numbers on your Out of State Property
When you hunt for properties, you will get a lot of potential options. You may have found one such comparable property that can rent well. But that doesn’t mean this property makes a great fit for your condition unless you run complete numbers on it. When you buy a rental property in your own state, it is easy to bring all the numbers on board. But running numbers on a rental property in another state, you can go wrong.
Read: Learn how to Rental Property Cash Flow Analysis the right way
There can be a chance you are underestimating a mortgage rate for out of state property. You live far away from your property, the chance will be you have to pay more for repairs and rehabbing the place. Also if you choose to pay a visit to your property may be at least once a year, that cost will also add up in your expense list. It will be better if you write all the upcoming expenses first and then calculate your monthly cash flow before finalizing a deal.
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Build a Great Team to run the rental business out of state
The rental property you are considering to buy can be 2000 miles away from you. Will it be feasible for you to visit in person every time if something goes wrong. If not you, who will then? This is the only concern that unsettles most investors to consider buying rental properties out of state. But if you can build a great team that can walk the foot for you, there is nothing much you need to worry about.
You can choose to take help for someone you know who lives in that state and has some experience in running a rental business. If not, you preferably need these four persons to skyrocket yours out of state rental journey which includes a realtor, a home inspector, a contractor, and a Property Manager. Your business success depends primarily upon these four and hence you should choose them wisely.
- Realtor: A Realtor can help you find a good deal. He is an expert in the real estate of his area and can advise you what`s best and help you close the deal much faster.
- Home Inspector: You can not visit the property on your own but a home inspector can inspect the property on your behalf. He can advise you on the necessary repairs that are needed on the property and whether the property meets the local codes or not.
- Contractor: You need a contractor to make the necessary repairs and bring the property on code before having tenants on the property. Also, you will need the contractor if any maintenance requirement arise in future
- Property Manager: Your property manager will act on your behalf on your property. He needs to be there to manage your rental, have tenants on the property and take maintenance requests and look after the property. (Always Check for references)*
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Analyze the Risks of Buying Property Out of State
Buying a Rental Property out of state is sure a good way to maximize your returns from your investment. But still, there are few challenges that can derail your plans if not put under consideration.
- Experience:
Is this going to be your first rental property or do you have some experience of doing a rental business before? It is very important to determine where, as an investor, you are standing in terms of the experience of running a rental business. Certainly, buying a rental property out of state can go wrong for you if you are starting the rental business for the first time.
There are a lot of rights and wrongs that occur in a rental business on a daily basis. You can definitely start from scratch, learn from the experience and act in time if your rental property is near to your residence. But if you own a property in another state, things can go really bad for your business. Being a first-time investor, you should then consider other alternatives rather than buying a rental property out of state.
- Finding Good Tenants:
Having good tenants are very important for the success of your rental business. But it can be a chance that even after having a good property manager, you face trouble securing good tenants. So it is always better you stay in a loop with your property manager. A piece of advice is to handover your rental criteria from day one to your manager and let him find renters accordingly.
- Upkeep of Your Property:
It is important that your rental property remains in top shape to be able to attract renters. But the thing is that a property manager may not have the same level of concern for maintaining your property as you do. Better you keep reminding him of inspecting the property at regular intervals and notify you of even the slightest issue on the property. Facetime with your property manager and having a virtual tour of your property can work wonders.
Also Read: What if the Rental Property you considering buying is already occupied by Tenants?
What Other Investors feel about Buying a Rental Property out of State?
- Clayton Morris from Morris Invest says “Fall in Love with the ROI and not with the Real Estate.”
- Peter from Passive Income MD says “Live where you want, invest where it makes sense.”
- Alexander from Cash Flow Diaries says “He has already bought 4 Rental Properties out of State and feels great about it.”