Investing locally is often ideal, but not always viable. Being in an area where the market isn't strong for investments shouldn't stop you from investing in real estate.
Owning real estate outside of your city, town, or even state can be a profitable investment if you know what to do.
Take a look at why investing in a rental outside of your local area may be a good idea and what to know before buying an out-of-state rental.
Benefits of buying rental properties out of state
The largest benefit of buying rental properties out of state is access to more affordable real estate. In most cases, these properties offer higher returns.
There are some places where the cost of real estate is expensive, making rental property investments out of reach. For example, the average property costs $671,400 in New York City, $548,700 in California, and $592,300 in Boston.
Considering the median household income is $60,879 in New York City, $71,805 in California, and $66,758 in Boston, investors in markets like these may benefit from investing in rental properties out of state.
There are dozens of markets across the country that have high rental demand, growing economies, and cheaper real estate. These factors make it possible to own a rental property and often mean better returns.
Additionally, some states have higher property taxes or property insurance rates than others. This can affect the overall profitability and return of a rental investment. Investing in markets with a low cost of rental ownership may increase the rate of return.
Even if your local real estate market is affordable, it may not be advantageous to own rental properties there. The market may be oversaturated and rental rates could be low. You may live in a market that isn’t growing economically. You could be in a rural area that doesn’t support owning a rental investment. Demand plays a large role in the profitability and success of a rental property.
Branching into new cities or states lets you invest in real estate where there's economic development, population growth, and higher rental demand.
There are many reasons to invest in out-of-state real estate, but there are also several points to be aware of before buying an investment property. Let’s explore the factors you should consider before investing in rental properties out of state.
Know the market
One reason people like to invest locally is that they're comfortable with their knowledge of the market. Having a strong understanding of how a market is performing, the demand for the rental property type, and what economic factors contribute to a stable investment market is incredibly important. If you invest out of state, you have to know the market as intricately as you know your own.
Look for growing rental markets
When searching for a new state or area to invest in, identify which markets have affordable real estate, high rental demand, and a growing economy and population. Several industry websites can help you find these areas:
Understand local laws
Be sure to research tax laws in the state you’re looking to invest in. Some states require you to pay income tax if you own profitable real estate. Others have local laws on rental properties (including rent control or stabilization). While the city may have demand and affordable housing prices, there may be other areas that would be better because of their more favorable landlord and tax laws.
Identify the ideal neighborhood for your property type
Next, identify the most suitable micro-markets within the larger metro area. Just because a city looks promising doesn’t mean the entire city makes sense from an investment standpoint. Identify desirable zip codes or neighborhoods that have jobs and amenities nearby and are undersupplied based on your desired investment property type.
Much of this information is readily available online and many investors choose to conduct their own market due diligence. However, for those with less time on their hands, it may be beneficial to identify a large target market and reach out to a local Realtor who can help you identify the best micro-markets to target based on your investment desires.