There are a lot of decisions to make when it comes to investing in real estate. One of the first decisions you’ll have to make is where to invest in real estate. Most investors stick to their local housing market since they are familiar with it. While this seems like an ideal option, it’s not always viable. In many cases, buying a rental property out of state is a better option, especially if your local market isn’t strong for investments. Here are some of the main reasons why you might want to consider out of state real estate investing:
- Affordability: Perhaps you live in a high-cost city like New York or San Francisco and can’t afford to buy a property there. You can find cheaper investment property for sale in another state.
- Profitability: You might live in a town or city that offers poor returns for investors. Investing in an out of state market can be more profitable than investing within your own state.
- Investor-friendly laws: The property laws in your city might not be investor-friendly. You are better off finding investment property for sale in another state where the laws are advantageous for real estate investors.
- Diversification: The number one rule to risk mitigation in real estate investing is diversification. And buying an out of state rental property is a great way to diversify your investment portfolio.
Related: When Is Out of State Real Estate Investing a Smart Choice?
Whatever your reason for buying investment property for sale out of state, you must make sure to find the best real estate deals. “How to find investment property for sale out of state?”, you may ask. Well, let’s have a look at what you should do.
Step 1: Real Estate Market Analysis
When it comes to investing in out of state rental property, the first step you should do is find a city that is well-known as a fruitful location for real estate investing. To do this, you need to perform a real estate market analysis. A real estate market analysis is essentially gathering data about different housing markets within the United States and analyzing it to understand how each market is performing. This is a crucial step, especially when you’re not present and can’t get a first-hand impression. By exploring the data of different housing markets, you can easily make comparisons between them and make a decision as to which city is best for real estate investing.
There are a number of elements that you should look at in a real estate market analysis. You can start by looking at the market’s housing supply compared to the demand in order to figure out whether it’s a buyer’s market or a seller’s market. Check the median property price and see how it compares with other markets in terms of affordability. Check the owner-to-renter ratio to get a sense of the rental demand. Real estate appreciation rates are also worth checking to understand the changes in property value. You can find all this information on real estate websites such as Mashvisor, Zillow, and NeighborhoodScout.
You also need to gather information about the city’s economic and demographic trends to get an idea of where the real estate market is headed and what it will look like in the future. Do some research on the city and check if there is an opportunity for growth. Are there any new development projects planned? Are new companies moving in and bringing new jobs to the area? Are people moving into the city looking for homes to live in? These are all good signs that a real estate market will be profitable.
The best places to invest in real estate are those that have high job growth, good population growth, affordable housing, and moderately increasing home prices. You have to carefully do your research to find the right city that offers all these elements.
Step 2: Neighborhood Analysis
Now that you’ve found the right city, the next step is to find out the best neighborhood to invest in based on your budget. Remember, not every neighborhood in a real estate market is good for buying rental property. You want to make sure to pick a neighborhood that:
- has a median listing price close to your budget
- has a high potential for returns
- suits your rental strategy, i.e. traditional or Airbnb rental strategy
Now, the main issue with long distance real estate investing is the lack of familiarity with the housing market. This is where the importance of running a neighborhood analysis comes in. A neighborhood analysis allows you to determine the average performance of investment properties in a given neighborhood. The best way to run a neighborhood analysis is by using a real estate heatmap.
A heatmap is an online real estate investing tool allowing investors to visualize neighborhood data on a map. It uses a system of color-coding to indicate how different neighborhoods are performing according to specific real estate metrics. Each color represents a certain value, and so depending on the color, you can tell whether a neighborhood’s values for the selected metric are high or low. Neighborhoods that have the highest values of the selected metric will typically be highlighted in green, while the neighborhoods with the lowest values will be highlighted in red. This simple color scheme allows you to quickly figure out which neighborhoods have good performance for the different real estate metrics.
Mashvisor’s Heatmap is perfect for those looking for an investment property for sale out of state. With this tool, you can easily identify the best neighborhoods for real estate investing in any city across the United States, for both traditional and Airbnb rental income properties, based on four key metrics:
- Property Listing Price
- Cash on Cash Return (Traditional and Airbnb)
- Rental Income (Traditional and Airbnb)
- Airbnb Occupancy Rate
To determine the optimal neighborhood, you will have to target the red color for the property listing price, and the green color for the cash on cash return, rental income, and occupancy rate.
Related: Real Estate Heat Map: A Revolutionary Tool for Neighborhood Analysis
Step 3: Investment Property Analysis
Once you’ve found the optimal neighborhood to invest in, the last step is to conduct an investment property analysis to find the most profitable investment property for sale in that neighborhood. There are plenty of rental properties listed for sale in a neighborhood, but this does not mean that every single one of them will make for a good real estate investment. You need to analyze the different properties in the neighborhood to figure out how much your return on investment will be for each of the listed properties. To do this, you will need an investment property calculator.
An investment property calculator is an online tool that calculates all the important real estate metrics that you need to evaluate the profitability of an investment property for sale in a specific market. You can use Mashvisor’s Investment Property Calculator to obtain these metrics for each listed investment property for sale. It is very user-friendly and it will help you greatly in your investment property search. All you need to do is simply insert some basic details such as your method of financing and your cash down payment. Employing rental comps data and predictive analytics, the tool will then estimate the following metrics:
- Rental Income
- Rental Expenses
- Cash Flow
- Cash on Cash Return
- Cap Rate
- Occupancy Rate
This analysis is performed for each listed investment property for sale in the neighborhood. This allows you to easily compare the different properties based on these metrics and identify the property that has the best investment performance and the best potential for returns.
The great thing about Mashvisor’s Investment Property Calculator is that it gives you the real estate metrics mentioned above for both the traditional and Airbnb rental strategies. This allows you to determine which rental strategy works best for your investment property.
Related: Why an Investment Property Calculator Is Smarter Than an Investor
In order to choose the right investment property for sale, you must make sure to find a property with the following metrics:
- A rental income higher than rental expenses (positive cash flow)
- A cash on cash return of 8% or higher
- A cap rate within the range 8-12%
- A high occupancy rate
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