066: The Pros and Cons of Out-of-State Investing

SHOW NOTES FOR EPISODE 066 –  THE PROS AND CONS OF OUT-OF-STATE INVESTING

Investing out-of-state can is an important decision for real estate investors.  Although there can be significant advantages, there are definitely negatives as well.  Before making that decision, carefully consider the benefits and drawbacks first to make sure it is for you.  In this episode, Bill, who only invests out-of-state, shares some of his top out-of-state investing pros and cons.

As those of you who listen regularly know, I only buy out-of-state.  California is just very expensive and, for the type of multifamily buy ‘n hold investing I do, it makes sense for me to buy in other US markets.   That doesn’t mean I won’t buy locally but, right now, there are more and better opportunities out-of-state

Buying and owning property is rarely easy or simple. When the property in question is in a distant location, the challenges multiply.  Investing in out of state property might seem appealing if you live in an area where real estate is expensive. It might also appear attractive if you already own property where you live and you want to diversify your holdings. Or you may just want to own a vacation home. But before you make an offer, carefully consider these issues.

Reasons to Buy

One factor that leads people to consider buying property far from home is that property may be more affordable in another state. Perhaps you live in an area like I do in Southern California  or maybe you live in New York City, where property costs are sky high. If you simply can’t afford to buy a place where you live or if doing so would require investing the majority of your money in real estate and you’d rather diversify your investments, you may want to look at other cities where market fundamentals are sound but property costs are significantly lower.

People who live in depressed areas but don’t want to move for work or personal reasons may be better off renting in their hometown and investing in real estate where the economy is stronger. For example, if you lived in Las Vegas, the city with the highest foreclosure rate during the housing bust, you might have wanted to buy property in a market where median sales prices remained relatively stable, like Charlotte, North Carolina.

Perhaps the main reason people decide to invest in property out of state is that the return on investment (ROI) may be better in another market than it is at home.

Personally, I favor investing in under market value, buy-and-hold properties — with seller financing, if possible.  Long-term cash flow is, in my opinion, the best vehicle for massive wealth accumulation.  Out-of-state markets just give me bigger returns and more options.

But I won’t lie to you.  Buying out-of-state definite has it’s minuses as well as its pluses.  The reason for doing tis podcast is to help you to make the best decision for your needs, while understanding the risks involved.

This podcast will be in two parts.  The first episode will zero in on the pros and cons of out-of-state investing and the next Fun Fact Friday podcast will talk about how to best buy out-of-state to avoid the pitfalls.

So let’s, first, look at the pros

Pros

• Affordability – lower purchase price (more for your money)
• Can buy nicer/newer properties for less money (less CAPX costs)
• Better appreciation rates
• Lower mortgage
• Lower property taxes
• Better tenant/landlord and housing regulations
• Stronger rental market
• Market Diversity – Market fluctuations don’t affect you as much if only one of your markets is hit or disasters hit.  You have other properties (i.e. what if you invested in properties in New Orleans and then Katrina hits)
• Truly Passive – You are away from the property and the distance “forces” you to enjoy “passive investing”
• Can Invest in Top Markets – You can invest in the best markets for return, growth, etc
• ROI (Return on Investment) is higher – main reason most invest!
• Good price-to-rent ration – What does it cost to rent a house compared to buying one?
• Better cash-on-cash returns
• Better CAP rates
• Can be used as vacation home
• You can buy in an area where you have family. They can help you run it and you can also have a place to stay when you visit
• Cost of services can be less

Cons

• Not for control freaks
• Significant learning curve
• When there’s an emergency the distance can be a drawback
• Unfamiliarity with the market
• Unfamiliarity with local economic conditions (both at city and neighborhood level)
• Unfamiliarity with all regulations and laws
• Can be expensive to visit
• Finding quality tenants
• Need to rely on others (PM, broker, etc.) to make decisions and get things done
• Won’t have day-to-day knowledge of area like your own backyard – “best neighborhoods” “worst neighborhoods”
• Have to rely on word-of-mouth, research, gut instincts and opinions of professionals you hire.
• Must hire a property manager
• Sometimes there are higher insurance rates, mortgage rates or higher down payment for out-of-state investors (based on bank)

Next week:  Some Tips for Successfully Buying Out-of-State Properties.  What to avoid.  How to do it right.

Until our next podcast, keep moving forward and God bless!

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