It is important to be open minded whenever a new opportunity comes your way. Even though buying a four-family rental or a property 300 miles away may not be on your radar, it is worth giving a look. What you may find is that something unexpected can lead your business on a completely different path. Such is the case with out of state properties.
There are times when you need to generate business outside of your primary investing area. The competition may have increased, demand reduced or the price points in your area are no longer what you are looking for. Buying out of state may initially seem like a risky venture, but with a little due diligence you can easily make it work. However, you need to know exactly what you are getting into prior to getting too far. Buying in the right market can yield exceptional returns, however choosing a bad market can start a vicious cycle that is damaging to your business. Here are five items to consider with out of state investments.
- Eviction Policies: It is too simplistic to blindly follow the markets with the best ROI. Things may seem great initially, but if there is trouble your business will be wiped out. Instead of looking at numbers you should start by looking at policies. Every state has slightly different policies when it comes to evictions. As much as you think that an eviction will never happen on one of your properties, the odds are it will. Even good tenants have unexpected problems that can quickly spiral out of control. When it does happen, you don’t want to be in a tenant friendly state. Certain states allow for extensions that can drag the process out literally months. You are at the mercy of the courts and you will be forced to cover the mortgage until the eviction is over. On the flip side, a landlord friendly state can expedite the process in weeks and allow you to quickly move on without much damage. As important as numbers are, you should always consider the eviction policies before committing to any market.
- Management: The most common concern with out of state properties is management. Most investors are control freaks and want to be on top of everything. With out of state properties you cannot be available when the unexpected strikes. You need to rely on the management team you put in place. Most property managers offer similar services and fees. You want to see what management challenges the area presents, prior to starting your search. If the market has weather concerns or is in a student housing zone, the management will be more challenging. This means the monthly fee will be higher, lowering your bottom line. Additionally, you don’t want to invest in an area where you will get called about the property or the tenants every week. Unless the ROI is significant, this is a headache you don’t want to deal with.
- Rental Demand: It is never a good idea to chase the market. Going to where a hot market is now, may mean trouble down the road. You want to look at areas where you can be confident that rental demand will remain strong for the foreseeable future. This takes a little bit of due diligence on your end. You need to look to see where rentals are preferred over buying. Your search should include data on area home sales, average time on the market and price trends. Once you have decided on a state, you should look for sub pockets within the state to see if they validate your research. In most areas, buying demand is below rental demand. Changes in mortgage guidelines and increased interest rates may keep demand lower in the short term. You need to make sure your market is in line with rental demand.
- Taxes: It is not enough to find an area where demand is strong, and rents are high. You need to always be conscience of the bottom line. One of the greatest influences of the bottom line are property taxes. Taxes can change dramatically from town to town. It is not uncommon for two bordering towns to have a 35% difference in the annual tax base. Subsequently, this will trickle down to you and directly impact your monthly cash flow. Unless there is a major influx of capital, you shouldn’t expect taxes to get reduced after taking ownership. In fact, in most cases the number will only continue to rise.
- Economic Growth: Buyers, and renters, go to where jobs are. We live in a different world from 50 years ago. In the past, adults stayed at the same job until retirement and raised their kids in the same house they were born in. Over the past decade there has been an increase in job uncertainty, even with major corporations. The bottom line is that people move more often, going to where jobs are. It is critical that you look for states where the economy is on the upswing. If not, people will slowly start moving out leaving you with a diminishing asset. You won’t be able to rent for top dollar and when it is time to sell, you will be left disappointed in the return.
Out of state investing isn’t something you should avoid. It can change your business if done properly. Use these five keys to help pick the right out of state market for you.