You’ve landed your dream job working in Silicon Valley. You’re earning a decent paycheck and are considering your investment opportunities. Real estate is appealing, but there’s a snag – the $1.4 million median sale price!
If you’re keen to start investing in real estate, investing out of state could be a great option. This allows you to get your foot on the property ladder and start earning a rental income. In time you could cash this out or use it as leverage for another investment.
But there are some potential pitfalls you need to know about before making an out of state real estate investment. We’re here to show you how to do it the right way.
Read on for our complete guide to being an out of state real estate investor.
Why Buy Out of State Real Estate?
The bottom line is that it’s often much more affordable to buy a home out of state than where you currently live. Many people on the east and west coasts find that they are being priced out of the local property market. However, they would still like to become real estate investors.
Take Memphis, Tennessee as an example. It has been highlighted as an up-and-coming place to live. It’s home to Fortune 500 listed companies and has an affordable cost of living.
And the median cost of housing is just $265,797 for the entire Greater Memphis area. And there are excellent properties available for way under that figure.
Great Return on Investment
The sale price of a property is only one piece of the puzzle. To make an investment property work, you need strong rental demand and to be able to command a good rent for your property.
This is where you’ll need to do very careful research. Don’t ever buy an investment property just because it seems cheap. Find out which real estate options in the local area yield the highest returns and have the strongest demand.
For example, there may be a glut of cheap apartments for sale in a certain area because there’s very little rental demand. But if you buy a single-family home you can make a great return on your investment because there is strong rental demand and prices.
Going back to Memphis as an example, there is currently strong rental demand, with 42% of households renter-occupied. The median rent has also risen to $950, up from $888 a year ago. With rents 30% lower than the national average, there may be the possibility of rent increases in the future.
As well as the purchase price and level of rent, there are other factors to consider when calculating the return on investment. These include:
- Mortgage costs
- Management fees
- Insurance
- Maintenance costs
- Tax
There are also some unknowns to consider, such as future property prices and rental demand. It’s impossible to make a perfect calculation, but be realistic and plan for what you will do if your profit reduces or even disappears.
The Need for Caution When Buying Out of State
The disadvantage of buying out of state is not knowing the area. When you live somewhere, you build up a knowledge of local market conditions. You know the sketchy neighborhoods and the types of homes that appeal to different families. You won’t have that innate understanding of other markets.
But it may be that there are markets away from where you currently live that you do know and feel confident working in. This could be where you grew up or went to college.
Choose the Property Very Carefully
You should never make a real estate investment on impulse. What seems like a great deal online may not be so great when you check it out in person. Treat this like any other investment, do your research, and weigh up the risks and opportunities.
One way to reduce your exposure to risk is to get a home inspection before you purchase. This will show up issues such as:
- Pest infestations
- State of plumbing, electrical, and HVAC systems
- Structural problems
This can help you to make a wise choice. If you back out, all you’ve lost is the cost of the inspection and not thousands of dollars in making repairs.
Investing in a turnkey property is another way to reduce your risk. These properties have already been renovated to a high standard. You get the peace of mind of knowing that the property has been renovated to code and should not require major repairs in the near future.
Check Out the Cost of Borrowing
Some lenders are more cautious about lending to out of state investors. The cost of borrowing may be higher or more stringent terms may be imposed. The only way to know is to apply to several lenders and review your options.
How to Make a Success of Investing in Real Estate Out of State
The key to successful out of state investing is local property management.
They know the local market and can help you to set the rent at the right level. They’ll undertake tenant screening to find you tenants who will pay and stay. Then they’ll collect the rent and handle all inquiries from the tenant.
They will also maintain your property. If you choose a company with in-house maintenance crews, you can reduce your costs considerably.
They also understand local landlord/tenant laws and property taxes. They can help you to meet all of your legal obligations.
Turnkey Property Investment Companies
Turnkey property investment companies renovate properties and sell them to investors. They then provide optional property management services.
This allows you to invest in a property that you know is in great condition. Some companies also offer a one-year maintenance guarantee on their renovation. Some provide a leasing guarantee that covers your mortgage costs if they can’t find you a tenant within 90 days.
An out of state real estate investment will always have its risks. But working with a turnkey property management company can reduce many of them.
Choose Memphis Investment Properties for the Best Experience
Are you ready to invest in an out of state property?
If you choose the right one, you could earn a steady income and have a property that increases in value. And if you work with a turnkey property investment company, you can save yourself a lot of headaches many investors face.
At Memphis Investment Properties, we have over 40 years of experience in the Memphis real estate market. We’ve renovated over 6,000 properties and work with 750+ investors.
Why not call us at 901-244-5820 or contact us online to learn more about why Memphis could be the right choice for you.