Understanding Out-of-State Real Estate Investing

Investing in real estate can be a lucrative venture, and many investors are now looking beyond their local market and considering out-of-state properties as part of their investment strategy. Understanding out-of-state real estate investing is essential for those looking to diversify their portfolio and potentially generate higher returns.

Out-of-state real estate investing can offer diversification, potentially higher rental yields, and access to markets with more favorable investment conditions compared to one's local area. By understanding the nuances of out-of-state real estate investing and taking the necessary steps to mitigate risks, investors can capitalize on opportunities in new markets and enhance their investment portfolios.

How Does Investing in Out-of-State Property Work?

Purchasing real estate outside your home state is more difficult and time-consuming than buying a home in your local area — but it isn’t impossible. Here are the basic steps you’ll need to take when you buy a property from out of state.

Locate an Investment Area

Arguably the most difficult part of investing in a property from outside your state is that you must first choose an area where you want to invest. Start by investigating the real estate markets of areas you’re familiar with such as favorite vacation spots, towns you visited growing up or your old college town are all great places to begin.

You can also search for real estate markets by average price, housing affordability, mortgage originations and more. The ideal market to invest in will heavily depend on the type of real estate investment you want to make.

If you plan to rent out the property, you should research each state’s landlord-tenant laws. However, if you’re looking to “flip” homes in need of repair, you might be more concerned with local property taxes. We’ll touch on a few housing market indicators you can use in your real estate investing search in the next section.

Choose a Property and Investigate Further

Once you choose an area you want to invest in, you can use online real estate databases to see what’s on the market. However, you should never purchase a home solely based on online listings. Listings may be out of date, and they may not show you the full picture of the home’s condition.

Hire a local real estate agent or realtor to investigate the property on your behalf. He or she may be able to send you additional photos of the property and teach you a little more about the home in the context of the local housing market. Your agent will also be invaluable in helping you build a list of reliable repair technicians to call on if you decide to rent out your property.

Apply for a Mortgage Loan

When you find a property you want to invest in, it’s time to apply for a mortgage loan. Not every mortgage lender is authorized to issue mortgage loans in every state, so look for a lender that services your area of choice. For out-of-state investors, online mortgage lenders (like Better.com and Rocket Mortgage by Quicken Loans) can provide a convenient solution. Once you’re approved for a loan, you can submit an offer on the home.

Keep in mind that it’s more difficult to get a mortgage loan for an investment property than it is for a home you plan to live in. You might need to meet higher credit or income requirements to qualify for an investment property mortgage.

Get an Inspection

Before you close on your loan, be sure to get a professional inspection before you close. An inspection gives you a more intimate look at your home’s inner workings and ensures that you aren’t buying a home with a ton of hidden problems.

Close on Your Loan

Once your inspection clears and your seller accepts your offer, you’ll close on your loan remotely. You can also choose to attend the closing in person if it’s possible for you to travel.

Real Estate Investing Optimal Market

Out-of-state real estate investing opens a very wide range of cities, states and communities to invest in. How can you tell which area is worth investing in? Here are a few indicators to look for when you shop.

• Housing starts: The number of housing starts in an area tells you how many new construction projects are currently in effect. If an area has a larger number of housing starts, it might mean that there will be more demand for housing, which increases rental rates and values.
• Average home values: Take a look at how average home values in a certain ZIP code have changed over time. You can protect your investment by choosing properties in areas with rising home values.
• Rental affordability: Rental property affordability statistics tell you what percentage of an area’s population can afford average rent while spending about 30% or less of their income on rent. If you purchase a rental property in an area with higher affordability, you’ll have a larger selection of tenants — but you’ll collect less in rent.

Best Investing Platforms for Out-of-State Real Estate

You don’t need to get a mortgage and manage a rental property from afar to invest in the real estate market of a different state. Real estate stocks, real estate investment trust (REIT) ETFs and real estate crowdfunding platforms can help you invest from your state with lower costs of entry and risk.

Learn more about a few of our favorite out-of-state real estate platforms below and learn how to invest in REITs and other real estate ventures. You can also read our full DiversyFund Review to explore the benefits and drawbacks of this unique platform.

Real Estate Investing Rewards

Out-of-state real estate investing comes with a number of unique advantages, including:

• Enhanced affordability: If you live in an urban coastal area, local real estate may simply be out of your price range. Investing in more affordable states can allow you to own property without stretching your budget unsustainably thin.
• Improved diversification: Even if you can afford your local real estate market, many investors choose to go out of state to add a layer of diversification to their real estate portfolio.
• Access to more favorable landlord-tenant laws: If you live in a state with very strong tenant and squatter rights (like California) you may run into more issues evicting problem tenants and reclaiming your space after a tenant has been evicted. You can circumvent these laws by investing in a state with stronger protections for landlords.

Real Estate Investing Risks

Out-of-state investing also comes with a number of unique risks, including:

• Inaccuracies in online listings: You can’t truly get to know a property without seeing it in person. Sure, you can look at photos and compare local property values — but you can’t smell mold or know that the thermostat isn’t properly calibrated from photos alone.
• Unscrupulous contractors and property managers: Local property managers and repair professionals are an invaluable asset as an out-of-state investor. However, your distance from the property might put you at a higher risk of running into untrustworthy or shoddy contractors and agents who are looking to take advantage of your inability to verify the work.

Before you invest in a property out of your home state, be sure to weigh both the risks and rewards.

Do Your Due Diligence Before Investing Out-of-State

Investing in real estate from out of state can be a challenge. But real estate investing no longer requires hours of driving and endless property tours. If you’re looking for a less active way to become a real estate investor, consider purchasing shares of a REIT instead.

Frequently Asked Questions