How to Invest in Property Out of State

For a lot of people, out of state real estate investing seems like too big of a risk. There are so many things that can go wrong, which can put off a lot of would-be investors. But, what if everything goes smoothly in the real estate investment process? Would you consider out of state real estate investing, then? 

Why Should You Do Out Of State Real Estate Investing?

The average 3-bedroom house in California costs around $800,000. If you live in California or any other state with similar market conditions (e.g., New York), you can be prevented from investing in the local real estate market by the high barrier to entry (in this case, cost of property).

On the flip side of that are states or counties where property costs are dropping, or where the market is too saturated. And, investing in real estate under those kinds of conditions, is just not feasible.

Whether you fall in the first or second category, the outcome will be the same – you won’t be able to invest in your local real estate.  

Top 3 Reasons for Out of State Real Estate Investing

1. Return on Investment

Let’s say, you live in Portland, where the average home costs around $450,000. With the median rent being around $1,800 and a rental yield of about 4.7%, it will take you decades to recoup your initial investment. Not to mention the fact that Portland is one of the most tenant-friendly cities in the US that imposes unnecessary regulations, additional taxes, etc…

Now, let’s take a look at Milwaukee and compare it to Portland. The median home in Milwaukee is priced at around $195,368, and the average rent for a 1-bedroom apartment is a bit above $1,400. Remember, the average home is not a 1-bedroom, meaning the rent for those homes can go up to almost $3,000. The average rental yield in Milwaukee can go up to 12.7% (far above Portland) and can bring an ROI of up to 10% (again, far more than in Portland). And, almost as equally important, Milwaukee is a landlord-friendly city (unlike Portland).

So, what’s the number one reason to consider out of state real estate investing? The answer is simple – better return on investment.

2. Lower Barrier to Entry Out Of State Real Estate Investing

Some states, cities, or counties have a high barrier to entry for anyone looking to invest in real estate. For example, an average home in San Francisco will cost around 1.3 million dollars, making that entire real estate market inaccessible to a lot of would-be investors. 

What can you do if you live in San Francisco and want to invest in rental property but don’t have access to that kind of money? The answer is simple, out of state real estate investing.

The median home in Houston is priced close to $260,000, making the entire real estate market of this city more accessible to a larger pool of investors. (i.e., the barrier to entry is far lower). 

The second reason to think about out of state real estate investing is – lower initial investment.

3. Diversification With Out of State Real Estate Investing 

Don’t put your eggs in one basket.

There’s a reason why this fairly old saying is still relevant today. Not just as a nugget of wisdom people can apply to their lives but also as a valuable lesson for all would-be or current real estate investors. Why? Let’s review.

Home prices in San Francisco, Palo Alto, and Dublin have dropped by a whopping 15%. Last year, if you bought an average home (as a rental property) in San Francisco, you would’ve paid somewhere in the range of $1.5 million. Now, that same home is priced at a little over $1.2 million. We can all agree – that’s a huge drop. And it is predicted to become even bigger.

On the other hand, prices in Florida went up during the last year, from about $350,000 for an average home to almost $400,000. 

Out of state real estate investing can help you diversify your portfolio and allow you to mitigate the risks associated with having all of your investments in a singular market (or all of your eggs in one basket). Diversification allows you to spread the risk across various markets and potentially increase your ROI.

How to Start With Out Of State Real Estate Investing?

Not having personal or professional connections in the state you’re looking to buy property in can be a huge drawback for many potential investors. In fact, this is one of the main reasons a lot of people are reluctant to make out-of-state investments – not having any local connections. 

It’s much easier and is seemingly less risky to invest in communities that you are familiar with or have connections in, even if your ROI ends up suffering for it. 

Now, it’s not all doom and gloom, as there are some ways to minimize the risk of out of state real estate investing while also keeping your ROI high and healthy (whether you have local connections or not). To start off you should:

1. Get To Know the State For Out Of State Real Estate Investing

Before making a purchase, you should get to know the state you want to invest in. To figure out how to choose the best location for investment property, try and find answers to questions such as:

Is the State Landlord Friendly or Not?

For out-of-state investors looking for a good way to earn passive income, ensuring that the state is landlord-friendly is of vital importance. This can have a huge impact on the amount of taxes you have to pay, insurance rates, eviction times for tenants who stopped paying rent, etc… 

Some of the most landlord-friendly states are:

• Alabama;
• Florida;
• Texas;
• West Virginia;
• Georgia;
• Arizona.

What’s the Local Real Estate Market Like?

Even if the state is landlord-friendly, it doesn’t mean it’s automatically ripe for investment. You should familiarize yourself with the local market, trends, prices, and the like. Here are some things to consider when trying to do research on a specific real estate market:

• Demographics – It’s the data about the composition of the local population. It takes into account factors such as income, age, race, gender, population growth, migration, etc.
• Economy – To determine if the economy is healthy or not, look for economic indicators (e.g. GDP, unemployment data, prices of goods, manufacturing, etc). 
• Interest rates – They can have a big impact on mortgages – the lower the DSCR loan interest rate is, the lower the mortgage cost will be. It is good for borrowers but can lead to increased demand and real estate prices.
• Government legislation – It can have a big impact on the local real estate market. Look for things such as tax credits, available deductions, various subsidies, and similar.

Once you did all your due diligence and have done your research on the specific state, it’s time to:

2. Secure Funding: Find a Mortgage Company

Even if you find a good investment opportunity, without the necessary funds, you won’t be able to do much (or at all). In fact, securing funding is one of the main obstacles in real estate investment, both in and out of state. This makes obtaining financing, the second step of out of state real estate investing. 

Mortgage companies’ sole focus is financing real estate purchases. They are often more reliable and more willing to lend money to prospective investors when compared to regular banks. When looking for a mortgage lender you should:

• Check your credit score and ensure all your credit reports are accurate.
• Find the mortgage loan that best suits your needs (e.g. Debt-Service coverage ratio (DSCR), Non-QM loans, FHA, or other types of loans)
• Different lenders will offer different rates. Look into various lenders and compare rates to find the most favorable ones.
• Apply for pre-approval with multiple lenders.
• Contrast loan estimates and go with one that offers the best terms.

NRI is a mortgage broker licensed in all 50 states. We specialize in investment loans and can help you find the best deals to finance out-of-state real estate property.

3. Form an LLC to Start Out Of State Real Estate Investing

Opening a Limited Liability Company (LLC) is a good idea for anyone looking to invest in real estate.

Let’s say you own a rental property and have a troublesome tenant who, for whatever reason, decides to sue you. With an LLC, you can ensure that all of your personal assets stay protected, no matter the outcome of that lawsuit. Forming an LLC should be looked at as an extra layer of protection against unforeseen circumstances.

Additionally, you should always open up an LLC in the state you want to purchase the property. So, if you want to buy real estate in Nevada, you should open an LLC in Nevada. If you want to do it in Wisconsin, open one in Wisconsin, and so on. 

There are numerous reasons for this, but it mostly comes down to the regulations and laws of each state. Some of them, like Texas and Florida, actually favor local businesses and give out subsidies, tax cuts, and other types of monetary incentives. Meaning, that opening up an LLC in the state you want to buy property in will give you certain advantages that can positively affect your ROI. 

We at NRI understand that opening an LLC seems like a big hustle. We took note of that and decided to streamline the entire process. All you need to do is give us the details and we’ll take care of the rest! We’ll connect you with the best lawyers, tax advisors, and CPAs (Certified Public Accountants), to ensure smooth sailing for your real estate journey.

4. Find a Property Manager

Property management is a term that encompasses different obligations that an owner of a specific property has to deal with. These obligations could include:

• Filing taxes;
• Finding tenants and collecting rent;
• Composing contracts;
• Handling property maintenance;
• Dealing with the on-the-spot emergencies;

So, if you choose out of state real estate investing, you have to find someone who’s local, to manage that property. This could be your friend or a family member (who lives locally), a professional property manager, or a property management agency. There are pros and cons to every decision, so think carefully when deciding on how to manage a rental property out-of-state.