I bought my first investment property out of state about six years ago, and have added a few more since then. I’ve had a good amount of people ask me what the process was like and how to do it, so I decided to write this post.
Is Investing in Real Estate for Everybody?
The first thing to understand is that investing in real estate isn’t for everyone. There are a lot of highs mixed in with some lows. And despite what the gurus tell you, it’s not completely passive. You don’t just sit on a beach while the rent checks come flying in–there are certain things you have to deal with like long vacancies, repairs, maintenance, capital expenditures, etc.
Your job is to decide if real estate is for you. After some research you might decide that it definitely is. Or you might decide that it’s not for you, and you’d rather be in the stock market or another type of investment. Which is totally fine!
Real Estate Investing Is Work
No matter whether you buy investment properties in your own neighborhood or out of state, it’s work. You have to research markets, connect with agents, drive and walk neighborhoods, run reports, and much more. And that’s before you even buy!
Once you actually buy the asset, there’s even more work. Finding a property manager or self managing, rehabbing if necessary, making repairs, getting multiple bids from contractors, and much more. Although often presented as passive, it’s a lot more work than clicking your mouse to buy index funds or individual stocks.
Why Would I Buy an Investment Property Out of State?
There are many reasons to buy a rental property out of state, here are some of the main ones:
- Your market is expensive and the properties in your surrounding area won’t cash flow
- The market you are in doesn’t meet your criteria
- An out of state market presents great opportunity for cash flow and/or appreciation
- Vacation rental/second home opportunities
If you end up deciding to buy out of state, make sure that you have really good reasons for it other than “it would be cool.” The reality is that it’s a lot easier to manage closer to you and going out of state shouldn’t be done haphazardly.
How to Buy Your First Investment Property Out of State
The rest of this post is about how to buy your first investment property out of state. It’s not a full and comprehensive list, but it’ll be a great starting point to get you going.
Number 1: Determine Your Goals
Before you do anything, determine your goals. Why are you wanting to invest in real estate? What benefits will real estate give you that other investments won’t? How active of an investor do you want to be?
Other questions to think about:
- Is out-of-state investing a better option than in-state or the stock market?
- Can I get better returns elsewhere?
- How much time do I want to spend on this type of investment?
- What’s my end game?
- And many more
Related: Crushing Your Long-Term Financial Goals
Answering these types of questions will help you determine if you want to invest in real estate in the first place, and if you do, what types of real estate investments you want to participate in. This will also lead to different markets, depending on what your wants and needs are.
Number 2: Research a Market
Take the time to research a market. Some questions to get you started:
- What is the average price and how much will you need to put down?
- Are the average rents going to support the purchase price?
- What year were the homes built and are there common expenses in these types of properties? (Example: foundation repairs, poor drainage, etc)
- Is the city investing in infrastructure to attract more residents in the future?
- What is the historical population growth and what’s it trending towards?
- Who are the major employers and how are these industries looking over the next several years?
There are literally dozens of questions you should be asking and answering, these are just a few examples of the types of things to be looking for.
Some markets will be easy to eliminate because they have negative population growth or a big employer is leaving the market. Others will be more attractive and you’ll want to spend more time on them. Think macro in the beginning then narrow things down.
Number 3: Cash Flow or Appreciation?
Are you going for cash flow or appreciation? Or both? The answer to these questions will determine which market you want to get into. If you’re going for appreciation, you’re likely to pick a coastal market that has historically appreciated.
If you’re going for cash flow with a long-term rental, you likely will end up in the Midwest or South. Or in an area that has historically provided steady cash flow.
Someone looking for both might need to go the short, or medium-term rental route. Those will be more labor intensive than a long-term rental but they will provide the greatest opportunity for cash flow and appreciation.
Number 4: Interview and Hire an Agent
Now that you’ve done some of the preliminary research, it’s time to interview and hire an agent. Talk with friends in the area who have worked with a good agent, look for reviews, go to a local meetup, etc. There are many ways to narrow down a list of agents to interview.
Once you have a few agents you want to interview, write down your questions and set up some times to meet with them. You can do this via Zoom or in person, whichever you prefer. Make sure the agent is answering your questions to your satisfaction and they seem like a person you’ll get along with.
Ask about previous deals they’ve done with clients and about their own investment properties. Ask about different locations that rent better than others. See if they have referrals to contractors, handymen, property managers, and other service providers. Basically this is a chance for you to ask what is important to you.
Number 5: Make a Trip to Narrow Things Down
Once you’ve done these steps, it would be a good idea to check things out for yourself. Walk/drive the neighborhoods, meet with the agent you selected in person, and really get a feel for the area. I consider this to be a “double check” of your research and previous actions.
Things get more real when we see them in person so you’ll probably get new ideas and thoughts about the area you’ve narrowed down. If things still feel right, proceed to the next steps. If they don’t, figure out why and don’t be afraid to pivot.
Think of your trip out as an opportunity to really get a feel for things. Look at the whole picture: neighborhoods, traffic patterns, infrastructure, restaurants, general vibe of the area, etc. After a couple days you should have a good idea of what you’re getting into.
Number 6: Make Sure You Can’t Get What You Want Locally
Take a second look and make sure you can’t get what you want locally. If you’re able to get everything locally that you would out of state, there’s really no reason to go to another area. Investing out of state can be costly when you include plane flights, hotel stays, rental cars, meals, etc.
Not to mention that a local property is a lot easier to drive by or inspect when needed. For those self-managing, a local property provides the opportunity to do the work yourself or closely monitor a project.
Number 7: Have a Plan to Scale
It doesn’t make a ton of sense to buy just one out of state property. It’s a lot of time and effort to do that. My opinion is that if you’re going to buy out of state/out of area, have a plan to scale.
The amount of preliminary work you need to do whether you buy one property or over five is the same. That’s why it makes sense to me to have a plan to scale if you’re going to do that work. If you’re not planning on scaling, another investment option probably will make more sense.
This isn’t a one size fits all approach because I realize there are outlier deals such as if you inherit a property, have a deal offered to you, want one vacation home/short-term rental in one area, etc. But in general for long-term rentals, it would make sense to scale if you’re long-distance investing.
Number 8: Don’t Be Afraid to Change Your Mind
There are going to be situations where you spend a good amount of time researching a market, including making a trip out to the location. Just because you’ve spent that time doesn’t mean that you can’t change your mind. If things aren’t as good as you thought they were, you should pivot to another market.
This goes for all things real estate. For example, if you’ve been using a property manager but things aren’t going as well with that manager, don’t be afraid to make a switch. Same for an agent or other providers––if they aren’t offering you the same level of service, make the switch.
Number 9: Make Offers and Buy
Now that you have everything in order and have gone through the process, it’s time to make offers and buy that property! Be confident in your process and the research you put in. You are ready to buy.
You’ve done the research in hiring your agent so lean on them for advice about how much to offer, repairs to ask for, concessions to ask the seller for, etc. Remembering that ultimately you are the boss, but want to lean on the agent for their expertise.
Once you’re in escrow, continue to rely on your agent for guidance. Make sure to do your due diligence, hire inspectors, bring your contractor/handyman in, have your property manager look at it, and much more. This is your chance to make the deal right so take advantage of the timeframe.
Conclusion
Buying your first investment property out of state isn’t that difficult, but it’s not easy or without complications either. That’s why not a lot of people do it. A lot of people talk about it, but few actually do it.
Use this post as a starting point and keep doing your research. Have confidence in your abilities and the research you performed. If buying an investment property makes sense for you and your family, keep moving through the obstacles to get it done, because it definitely is something you can do.
Have you ever thought about buying an investment property out of state?
