Sometimes, the best way to grow is to move away from home. This concept resonates with real estate investing. Sometimes, the best way to expand on your real estate investment portfolio is by buying a house out of state.
As great as buying a house out of state could be, it is not an easy task. Even after the actual purchase, maintaining and upgrading the investment property can be challenging. To reduce this difficulty and maximize your return on investment, here are some things to consider when buying a house out of state as an investment property.
Related: Out-of-State Real Estate Investing: The Good and The Bad
Look for the Best Neighborhoods
The main source of difficulty when buying a house out of state as a rental property is being in an entirely new location and thus real estate market. All of the points in this blog are based on being in a new location.
So, let’s focus on the essence of location in real estate: neighborhoods. When investing in out of state real estate properties, be sure to stick to good neighborhoods. This is crystal-clear, but finding these neighborhoods is not always as easy.
There are generally two ways to find profitable neighborhoods. You can rely on word of mouth, which never fails to serve well. However, this may fall flat, since you are in a new area where you are probably unfamiliar with the local people. That leaves the second option – relying on property search websites, like Mashvisor. When you use Mashvisor, you can find and learn about the neighborhoods of many, many US cities in a matter of minutes, without having to leave your house. Perfect for out of state investing, without a doubt.
Median Home Prices
Perhaps the most captivating incentive for real estate investors to invest in out of state income properties is cheap property prices. This is especially true with real estate investors living in expensive housing markets. For instance, based on Redfin’s Migration Report, around 20% of its users from San Francisco, notorious for its expensive market, opted for investing out of the city. For these investors, Seattle was the top out of state destination. This makes a lot of sense when you consider the median home prices of the two cities. According to Mashvisor’s data, the median home price in San Francisco is $1,298,119. The median home price in Seattle is $672,128. Seattle’s median home prices are nearly two times less than San Francisco’s!
Here’s the bottom line: when investing in out of state rental properties, be sure to consider the state’s median home prices.
Different State, Different Tax Laws
Another consideration when buying a house out of state as an investment property is the state’s – and city’s – tax laws. Property taxes are probably the best example, since their rates will differ entirely based on the real estate property’s location. These differences can significantly alter your overall rental income. For example, according to WalletHub, for the current year, the annual property taxes paid for a property at median home value in Alabama were $543. In New Jersey, this number was at a ridiculous $7,410!
Property taxes are not the only types of taxes concerning out of state real estate investments. Some states do not have certain taxes that others do, which will also impact your rental yield. For example, seven states, including Florida, Texas, and Nevada, do not have income property taxes.
Other Legal Aspects to Consider
Taxes are an important aspect of real estate legality, but they aren’t the only thing to consider. If you are investing in Airbnb investment properties, zoning will be a legal issue you need to take note of. Some cities and/or counties might prohibit or limit a real estate property’s usage as an Airbnb rental. The same might apply if you decide to rent out a part of your house on short term basis.
Airbnb’s legal requirements also extend to various types of permits. Some states ask for a single business license, while others demand multiple licenses and permits.
Another legal aspect to consider, especially with traditional real estate investing, is how ‘landlord friendly’ the state is. Buying a house out of state in a landlord friendly location will ease the process of an eviction, if one were to occur. Arizona, Kentucky, Florida, and Texas are examples of landlord friendly states.
Local Population and Economic Conditions
The population dynamics of an area will serve as a great indicator to an investment property’s potential success. Before you plan on buying a house out of state, learn about the state’s, and specific city’s, job market and population growth. A growing population, coupled with an improving job market, means a large pool of tenants. Factory construction, for example, leads to a surge in the number of people looking for residence in a certain location. A great place to get your research started is through the U.S. Bureau of Labor Statistics. Word of mouth can also serve as a great source.
Related: Top 5 Things to Look for in a Real Estate Investment
Suitable Rental Strategy
Different rental strategies are most effective in different places. When you are considering buying a house out of state for investment purposes, find out which rental strategy will be the most profitable.
Renting to college students is the perfect example. Some states and areas are most suited for college students. States including North Carolina, California, Massachusetts, and New York have popular college towns. These aren’t your only options, however. Virtually every state contains at least some locations that are utilized as college towns, or simply areas that attract college students. Find out where this place is in the state you are leaning towards investing in.
Test the Waters with Turnkey Properties
Perhaps the most popular form of income property when buying a house out of state is turnkey properties. Turnkey properties can be rented out to tenants immediately after the purchase. As a matter of fact, these properties are purchased from companies which also normally offer professional property management services.
As you can see, turnkey properties are a quick way to make a buck. However, they tend to lean towards the costly side of real estate properties. Also, they are different from most properties because appreciation is not involved. Still, if you want to get used to buying a house out of state for investment purposes, turnkey properties are an excellent choice to get things started.
Related: Why Investing in Turnkey Real Estate Investment Properties Makes Sense
Want to invest in out of state real estate properties? Begin your property search with Mashvisor and you’ll find the best investment in no time!