Investing Outside The Box: A Strategic Guide to Out-Of-State Real Estate Investing

I live in the San Francisco Bay Area – one of the most expensive real estate markets in the world. Back when I first started taking real estate investing seriously and started thinking about expanding my portfolio, I quickly realized that it would be nearly impossible for me to reach my goals if I were only to invest in Bay Area real estate.

Of course, there’s the high cost of buying a rental property here, which often means that you need $200k or more just for the down payment. Add on top of that the high taxes, high expenses, and strong tenant protections (which can limit landlord rights and abilities), and suddenly, the Bay Area doesn’t look so hot anymore.

Don’t get me wrong, there are certainly many investors who invest in the Bay Area and make strong returns. But for me and my investing goals? I quickly realized that I would need to look outside my backyard.

That’s when out-of-state investing first entered my purview. Suddenly, once I opened up the constraint of geography, the whole country became my oyster, which was daunting and overwhelming, but exciting at the same time.

The first time I invested in an out-of-state rental property, it took me several months of research, phone calls to brokers and property managers, and visits to the market before I was ready to pull the trigger.

However, once I got the hang of it, I was able to buy out-of-state properties sight unseen. Properties that went on to provide not only great cash flow but also excellent overall returns, though with some hassles of asset management (more on this in a bit).

In this article, we will demystify the process of out-of-state investing, outlining the compelling reasons to invest beyond your local market and the step-by-step strategies to manage risks and maximize returns. You’ll learn about identifying lucrative markets, navigating legal landscapes, and leveraging local expertise—all aimed at giving you the confidence to invest with long-term success in mind.

Related: The Ultimate Beginner’s Guide To Investing In Real Estate

Key Takeaways

  • Investing in an out-of-state rental property can yield higher ROI, portfolio diversification, and access to more affordable markets, backed by a stable job market and high rental demand.

  • Success in out-of-state real estate investing demands thorough market research, familiarity with local laws and tax regulations, and building a strong local support network.

  • Finding properties through online platforms, local real estate agents, and investor networking provides access to opportunities, while hiring a property manager and employing strategic management, are essential for ongoing success.

  • Not sure you want to be a long-distance landlord? There are other options for you to invest in real estate that are more hands-off – including REITs and real estate syndications.

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Why Out-Of-State Real Estate Investing?

Diversify your real estate investment portfolio with out-of-state properties

Branching out of your local market to invest in an out-of-state rental property might seem intimidating, but the rewards can be substantial. This venture offers the potential for higher returns on investment, allows for diversification of your portfolio, and provides access to more affordable markets.

Intrigued? Let’s unearth the potential of these benefits.

Related: What To Do With $100k In Cash – Saving Vs. Real Estate Investing

Higher Returns On Investment

High rental demand in out-of-state real estate markets

Why limit your investment potential to your local market when you can tap into the higher returns offered by out-of-state investments? Lower purchase costs, coupled with favorable housing regulations and high rental demand, can lead to a significant increase in your return on investment (ROI). Consider markets with lower housing prices but high rental demand, often fueled by a stable job market.

For example, the market I first invested in when I started my out-of-state investing adventures was Huntsville, Alabama. At the time, Huntsville was a little-known market that was up-and-coming. The cost of living was quite reasonable, and job growth was shooting through the roof.

Because I was able to invest at an opportune time in Huntsville’s trajectory of growth, my investments were able to generate significant returns, especially on sale (with several properties doubling in value or more!).

Regions like this, that are showing strong job growth, population growth, and job diversity not only promise a higher ROI but also provide a safety net for your investments, as a robust job market ensures that residents can meet their mortgage or rent obligations.

Related: How To Grow From Single-Family Landlord To Multifamily Millionaire

Portfolio Diversification

Investing in real estate across different geographical markets is not just about higher returns. It’s also a strategic move to diversify your investment portfolio. Diversification reduces the overall risk of portfolio loss during economic downturns in a single market.

Plus, investing in affordable housing across various markets contributes to less volatility in your investment portfolio, as the demand for reasonably priced rental units remains stable, even during economic downturns.

In essence, wouldn’t it be more sensible to distribute your investments into different markets?

Access To Affordable Markets

Investing in out-of-state properties

Sometimes, the best opportunities lie beyond your local real estate market. Out-of-state investing opens the doors to more affordable markets that may not be available locally. These markets often have sound market fundamentals and significantly lower property costs compared to your local area.

The post-pandemic trend of corporations and individuals moving from dense cities to suburbs and states with lower costs of living has opened up new investment avenues. It’s an opportunity worth exploring.

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Key Factors To Consider When Investing Out-Of-State

While the benefits of out-of-state real estate investing are compelling, it’s not a venture you should dive into blindly, especially since you won’t be able to easily drive over to the property in a pinch. You will need to build a solid team, understand the dynamics of the local market, and make strategic decisions to maximize the growth potential of your investment.

Success in out-of-state investing requires a keen understanding of several key factors, including market research, local laws and regulations, and the importance of building a local network.

Market Research And Analysis

Thorough research is needed for out-of-state real estate investment

Before you start scanning for properties in a new market, it’s crucial to understand the lay of the land. Researching and analyzing your target market, including job and population growth and job diversity, are critical steps in evaluating out-of-state real estate markets. Websites like Zillow provide insights into neighborhood data and potential ROI for properties in various areas.

A market with diverse job opportunities and strong local leadership supports a stable real estate market, offering more reliable investment returns. Remember – knowledge is power when it comes to real estate investing.

Local Laws And Regulations

When you venture into a new territory, it’s important to understand the rules of the game. This includes understanding:

  • Local landlord and tenant laws

  • Property taxes

  • Insurance costs

  • Other expenses

Navigating these laws is essential for managing the financial aspects of your out-of-state rental property. Moreover, understanding diverse tax jurisdictions may require specialized tax advisors to ensure compliance and optimize tax liability.

Hence, equip yourself with thorough knowledge and formulate your financial strategy judiciously.

Building A Local Network

Bridging the physical gap in out-of-state real estate investing is a challenge, but not an insurmountable one. Building a network of local professionals, such as real estate agents, property managers, and contractors, can provide significant support and local expertise for out-of-state investors.

A property management company, for instance, can handle critical tasks such as tenant placement, rent collection, and addressing repairs and emergencies, making it easier for you to manage the property remotely.

Strategies For Finding Out-Of-State Rental Properties

You can find out-of-state rental properties through online resources

Now that you understand why and how to invest in an out-of-state rental property, you might be wondering – where do I find potential rental properties, and how do I get started in my quest to buy rental property? Well, the answer lies in three key strategies: using online resources, engaging with local real estate agents, and joining investor groups.

Related: How To Invest In Real Estate With Your 401(k)

Online Resources

The internet is a treasure trove of information when it comes to real estate. Platforms like Zillow and Roofstock provide marketplaces and insights for out-of-state rental property investments, making it easier to find potential properties. Websites like these allow you to conveniently browse numerous listings and gather information about different real estate markets.

Hence, make the most of the internet and begin your property search with the platforms already available to you. This can give you a broad-strokes understanding of the markets you’re interested in, as well as the neighborhoods and specific assets you might want to invest in.

Start by zooming in on a few markets you might be interested in. Research specific neighborhoods within that market that meet your target criteria, and take a look at what’s currently available. Look at the price points of the properties and the condition they’re in.

Then, go to Craigslist, Facebook Marketplace, and other resources to research potential rental rates for homes of that size in that neighborhood. This will give you a starting point for determining which markets might make most sense for you and your goals.

Local Real Estate Agents And Brokers

While online platforms provide a wealth of information, nothing can replace the insights and expertise of local real estate agents. These professionals have an intimate understanding of the local market and can recommend properties that align with your investment goals.

Moreover, a real estate agent can alert you to matching properties as soon as they hit the market, saving you precious time and effort.

That being said, not every real estate agent understands the investment side of real estate. Many agents are focused primarily on buyers and sellers. So while they might be able to tell you about the quality of the kitchen appliances and how great the local neighborhood school is, they might not be able to answer your questions about how much the property could rent for.

So, before you commit to working with a real estate agent, be sure to interview them. Ask them about their personal experience with real estate investing and whether they have other clients who invest in real estate. This will help you in finding the right agent to work with.

Investor Groups And Networking

Networking with like-minded individuals and seasoned investors can provide you with invaluable insights and open doors to new opportunities. Consider joining real estate investor groups and attending networking events to learn from others’ experiences and identify potential investment opportunities.

Plus, networking events can be a great way to find other investors who might want to partner with you. Maybe one of you brings the majority of the capital, while the other does the lion’s share of the asset management.

Keep in mind that in real estate, your network can be just as valuable as your knowledge!

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Steps To A Successful Out-Of-State Real Estate Investment

Navigating the world of out-of-state investing requires careful planning and execution. Here are some key steps to ensure your investment journey is a successful one.

Related: How To Quit Your Job Through Investing In Real Estate

Property Inspection

Never underestimate the importance of a thorough property inspection. This crucial step helps identify potential issues and ensures compliance with health and safety codes.

The inspection may cost you a few hundred bucks, but that investment is well worth it to ensure you go into the investment with eyes wide open.

On top of that, while it may be tempting to rely solely on photos or descriptions, nothing beats a personal visit to the property. So, if you can be on site, all the better.

If you can, schedule a visit so you can be there for the property inspection, and bring your property manager with you. That way, you’ll be on the same page as to needed repairs and potential issues going forward.

Securing Financing

Securing your finances early can give you a competitive edge in the real estate market. Getting pre-approved for a mortgage not only streamlines the purchasing process but also guides you towards the appropriate price range and markets.

As for the terms of the loan, even if you’re investing during a time of higher interest rates, that isn’t necessarily a bad thing. If you can make the numbers work with a higher interest rate, that gives you the opportunity to refinance when rates come down, making the investment even juicier.

On top of that, you should also explore financing options with local lenders to understand the mortgage options available in the area of your out-of-state investment.

Hiring A Property Manager

Managing a property remotely can be a daunting task, but hiring a property manager can make it a breeze. A property manager takes care of tenant placement, rent collection, and property maintenance, making it easier for you to manage the property from afar.

This not only saves you time and effort but also ensures that your property is well-maintained and attractive to potential tenants.

When interviewing property managers, be prepared to speak with at least 3 different local property managers, so you get a sense of the options available to you, as well as the different rates they might charge and their different working styles.

Property and asset management are significant pieces of the puzzle when it comes to whether your investment will ultimately be a successful one, so take time to make sure you find the right property management partner.

Ongoing Management And Monitoring

Investing in out-of-state real estate is not a one-time task, especially when owning rental property. Regular visits to the property, maintaining clear communication channels, and utilizing financial management software are all part of the ongoing management and monitoring process. Regular inspections are necessary for addressing maintenance issues early and confirming tenant compliance with lease terms.

Using online services to automate and collect rent, as well as manage maintenance requests, can simplify property management and ensure consistency in income and property upkeep.

Common Challenges And Solutions

While out-of-state investing brings with it numerous advantages, it also presents certain challenges. Distance, unfamiliar market conditions, and legal and regulatory issues can pose obstacles to investors. But fear not, we have solutions to these challenges.

Distance And Communication

Distance can pose a significant challenge in out-of-state investing. However, with strategic management, this can be effectively overcome. It’s crucial to maintain clear communication channels with tenants and service providers to manage your properties effectively.

Combining effective remote communication strategies with periodic onsite visits can help you better manage your out-of-state properties and minimize the drawbacks of distance.

Unfamiliar Market Conditions

Unfamiliar market conditions can pose a risk to out-of-state investors. However, through extensive market research and leveraging local expertise, you can navigate this challenge. Ensure you have a deep understanding of the local economy, including job growth, population trends, and rental laws.

Bear in mind that thorough understanding is your best shield against unforeseen circumstances.

Legal And Regulatory Issues

Understanding the local property ownership laws and tax systems is essential for an out-of-state rental property. Legal and regulatory issues can be complex and varying across states, making research and professional advice crucial.

If you’ve found a great property manager you trust, they should be able to help you to navigate the local regulations, at least at a high level, and potentially also refer you to other local professionals, should you need more specific advice or guidance.

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Alternatives To Out-Of-State Investing

While out-of-state real estate investing has its merits, it may not be the right fit for everyone. Some investors may find the challenges too daunting, while others may prefer investment options that require less hands-on management.

For real estate investors, there are alternatives to direct out-of-state investment properties, such as Real Estate Investment Trusts (REITs) and real estate syndications.

REITs

REITs, or Real Estate Investment Trusts, offer an alternative to direct property investment. They allow individuals to earn income from real estate without owning or managing the properties directly.

REITs function similarly to mutual funds for real estate investment, providing investors with regular income streams through dividends. They also provide liquidity, as shares can be bought or sold on the stock exchange.

However, be aware that dividends from REITs are frequently taxed as ordinary income, creating a potential disadvantage for investors with a taxable brokerage account.

Plus, if you’re looking to diversify outside the stock market, REITs may not get you there, as they tend to follow the ups and downs of the market.

Real Estate Syndications

Real estate syndications (group investments) provide another alternative for those looking to invest in real estate. In a syndication, a group of investors pool their capital to purchase large real estate properties, like apartment complexes or hotels.

This allows individual investors like you to contribute to real estate deals with smaller amounts of capital and benefit from the expertise of seasoned real estate professionals who manage the investment.

Investors get all the benefits of investing in real estate – cash flow, equity, appreciation, and tax advantages – without the hassles and time commitments of being a landlord.

Syndications give you the flexibility to invest any amount (above the minimum investment) you want, giving you flexibility over buying a rental property, where you need to find a property within the price range you’re looking for.

Syndications also often offer a preferred return to investors, which is a threshold return that must be met before the syndicators can participate in the profits, which can contribute to stable cash flow.

Though some syndications are for accredited investors only, there are also opportunities – like real estate crowdfunding – open to non-accredited investors.

Further, because seasoned real estate professionals would be managing the assets on your behalf, syndications can make it easy for you to diversify into different markets and assets classes with ease.

Related: Rental Properties Vs. Passive Investing

Check Out Our Open Investments

Want to invest alongside us? Take a look at some of our current and upcoming offerings.

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Summary

In conclusion, out-of-state real estate investing opens up a world of opportunities for investors. It offers the potential for strong returns, portfolio diversification, and access to more affordable markets, particularly if you live in a more expensive area.

However, it also requires careful planning and consideration of key factors like market research, understanding local laws and regulations, and building a local network. While challenges such as distance, communication, and market unfamiliarity exist, they can be effectively managed with strategic planning and due diligence.

And for those who prefer alternatives, options like REITs and real estate syndications offer a way to earn from real estate without the hassles of direct property management.

Related: FIRE – Financial Independence Retire Early

Frequently Asked Questions

Should I invest in an out-of-state rental property?

If you’re interested in this path, we say go for it! You’ll learn a ton along the way, and investing in out-of-state property can help you diversify your rental portfolio and protect yourself from regional risks. Look for areas with sound market fundamentals and lower property costs to maximize your investment potential.

Can you invest in real estate in different states?

Yes, investing in real estate in different states allows you to diversify your rental portfolio and protect yourself from potential risks like natural disasters. This can help safeguard your investment and ensure greater stability in the long run.

Do I need to create an LLC when investing out of state?

The answer to this can depend on a variety of factors, including your overall portfolio holdings, appetite for risk, and more. Many investors do create an LLC when investing in an out-of-state rental property, to limit their potential liability, but we recommend speaking with an attorney to learn more about your specific situation.

Where is the best place to invest in US real estate?

There are many great real estate markets within the US. Some are already established and thus can offer lower risk; others are more up-and-coming and thus offer more potential. We recommend starting first with your goals, then working backward from there to find markets that will help you meet those goals.

What are the benefits of out-of-state real estate investing?

Investing in out-of-state real estate can provide you with strong returns, portfolio diversification, and access to more affordable markets, making it a smart investment choice. On top of that, real estate investing can provide you with great tax benefits – just ask your CPA!

How can I find potential out-of-state rental properties?

To find potential out-of-state rental properties, leverage online resources, engage with local real estate agents, and join investor groups for valuable insights and opportunities. Happy hunting!

Check Out Our Track Record Of Success

Curious whether we can actually do what we say we're going to do? Compare projected versus actual returns in all the deals we've exited to date.

download track record

Next Steps

Whether you’re thinking of investing out of state or investing passively in a real estate syndication, we invite you to join the Goodegg Investor Club, so we can keep you in the loop on opportunities to invest alongside us.

You can also check out our open deals page to learn more about our current or upcoming opportunities.

Learn More

If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101

You can also get a copy of our book – Investing For Good – or check out our Life & Money Show Podcast.

To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.

Connect With Us

If there’s ever anything we can do to help you on your journey, feel free to email us at [email protected] or call / text us at (888) 830-1450

Want To Invest With Us?

You're invited! Join the Goodegg Investor Club to get access to our open investments and to stay in the loop on upcoming opportunities.

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