When it comes to real estate investing, buying rental property out of state might not be the first thing that comes to mind. However, adding an out of state rental property to your investment portfolio can actually be a smart move that strengthens your strategy and improves your return on investment (ROI). In this guide, we will explore the benefits and risks of purchasing rental property in another state, as well as provide tips to ensure a successful investment.
Why Purchase Out Of State Rental Property?
There are several reasons why owning rental property out of state can be advantageous. Firstly, it allows you to diversify your rental portfolio. By investing in different geographic areas, you protect yourself from the impact of natural disasters or economic fluctuations in a single region. This diversification spreads your risk and helps to stabilize your investment.
Furthermore, owning an out of state rental property gives you the opportunity to choose the type of return you desire. Whether you're looking for high monthly cash flow or projected appreciation, you can identify the best states outside of your home market that align with your goals. This flexibility allows you to tailor your investments to your specific needs and preferences.
Lastly, if you live in an expensive market where the ROI on rental properties is low, purchasing rental property in another state could provide you with higher returns. By exploring markets with better affordability and rental demand, you can maximize your profitability.
Risks Of Buying Rental Property Out Of State
While there are benefits to owning out of state rental property, there are also unique risks to consider. These risks require careful planning and mitigation strategies. Here are some of the key risks to be aware of:
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Your property is not what you expected: Buying property sight-unseen is risky, even with extensive research. If visiting the property is not possible, request detailed photos and videos from the seller. Consider hiring an independent inspector and appraiser to reduce the risks associated with buying a property you've never personally visited.
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Difficulty finding quality tenants: Finding reliable tenants who will care for your property can be challenging, especially from afar. Hiring a trusted property manager can help you overcome this challenge by finding and placing tenants, collecting rent, and managing the property's maintenance. Regular check-ins with the property manager are recommended to ensure your expectations are being met.
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Lack of a support team: When dealing with issues related to your rental property, such as tenant disputes or property maintenance, being physically distant can make matters more challenging. It's important to have a trusted support team in place, including a property manager, lawyer, and local professionals to handle various aspects of property management and legal requirements.
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Maintenance considerations: Out of sight, out of mind applies to rental properties too. It's easier to neglect maintenance tasks when the property is not in close proximity. Rely on your property manager to stay on top of maintenance, but also set calendar reminders to check on regular upkeep and address any potential issues promptly.
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Unfamiliar local laws: Each state has its own set of rental laws, which may differ from your home state. Familiarize yourself with the local laws and consider consulting with a local lawyer to ensure compliance and avoid legal complications.
Tips For Owning Rental Property In Another State
If you decide to invest in out of state rental properties, thorough research and calculated decision-making are crucial for success. Here are some essential tips to consider:
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Pick a vibrant market: Look for markets with increasing populations, a strong local economy, and low unemployment rates. A vibrant market reduces the risk of your rental property sitting vacant for long periods.
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Get pre-approved for financing: Research financing options and get pre-approved before searching for properties. This streamlines the buying process and avoids unexpected delays or surprises.
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Do your research: Conduct extensive research on the property, neighborhood, and seller. Utilize online resources, check crime statistics, and hire professionals for inspections and appraisals. Investigate the seller's history and reputation to ensure trustworthiness.
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Run your numbers: Use a rental property income calculator to evaluate the property's potential returns. Be realistic with your estimates, considering lower expected rents and accounting for additional expenses. Only proceed with an offer if the numbers align with your desired ROI.
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Find a good property manager: Managing an out of state rental property requires a reliable property management company. Interview potential managers, ask for references, and read online reviews. Regular communication with your property manager is essential to ensure they meet your expectations.
Finding Out Of State Rental Properties
The internet is an invaluable tool for finding out of state rental properties. Search real estate listing websites like Zillow or Trulia, and gather additional information on properties and areas online. Roofstock is another useful platform specifically designed for real estate investors, providing comprehensive data on annual returns and cap rates.
If you have connections with a real estate agent, access the MLS for up-to-date information on your target market. Consult with local agents and fellow investors to gain insights into the rental market. Utilize your network and various tools to maximize your chances of finding the right rental property.
Summary
Investing in rental property out of state can be a smart strategy to diversify your portfolio and achieve higher returns. However, it requires careful research, strong property management, and reliance on accurate financial analysis. By mitigating risks and making informed decisions, you can ensure that your out of state rental property becomes a solid and profitable investment.
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