One of the biggest questions I hear is “How can I invest out-of-state? I hear the returns are much better, but how would I even start to do that?” Assuming you live anywhere other than in a handful of cities, you are probably right about the returns. You also realize that you don’t need to be local to your investments so that you can routinely “check in on them”.
So you are fully convinced this is what you want to do, now what?
The two major components of investing out-of-state:
- How to Choose a Market
- How to Find Properties in an Unfamiliar Market
How to Choose a Market
Choosing what market to invest in depends on your goals. For example, do you want to flip properties or buy rental properties? A good market for a rental property may not be a good flipping market and vice versa. I personally don’t flip properties, so I won’t focus on those markets here except to encourage you to make sure you do investigate what makes a good market for that type of investment. I can however suggest what to look for in a good market for rental properties. Some of these may even carry over to other types of investments.
Considerations When Choosing a Market for Out-of-State Real Estate Investing
- State Laws: Is the state tenant-friendly or landlord-friendly? You want to invest in a state that is landlord-friendly. This means that if you have a bad tenant the laws work in your favor to get him/her out as quickly as possible. Tenant-friendly states tend to give renters so many rights that you could potentially be stuck with a bad tenant for months while your expenses go through the roof (pun intended).
- Trends: What are the population trends in the market? Population is probably the most important trend to look at because it is representative of other trends you want to research, such as industry and overall growth trends. A growing population = awesome. A decreasing population = look out.
- Price-to-Rent Ratios: How much rent do properties in that market get compared to how much you have to pay to acquire them? For example, I have a rental property in Atlanta that I bought for $74,000 and rents for $1025/month. I looked at a comparable foreclosure in Orange County, CA that I would have had to pay $270,000 for and it rented for $1200. See the problem?
This is far from an all-inclusive list of things to look at when analyzing a potential market, but if those three things are good you are probably looking at a good market to buy a rental property. (In case you have no desire to do that much research, here is an insider’s tip- find people who have already done all of this analysis and piggyback off their finds. Make sure they are credible and don’t just take their word for gold, maybe even double-check what they say with some easy research, but this will save you a lot of research time on your own.)
How to Find (Rental) Properties in an Unfamiliar Market
Now you’ve chosen a rental market to invest in, but how do you find a property? I’ve seen it done one of two ways: You find a real estate agent you really trust who has connections to contractors, inspectors, and property managers –or– you can buy a turnkey property, meaning at the time you buy the property it is fully rehabbed with tenants and property managers already in place. Which route you choose depends on your goals for getting into the property. Are you primarily focused on the numbers, or are you more focused on less risk and less work? Here’s a breakdown of the two options: