There are many debates in the world of real estate investing. Multiple family versus nuclear family. Residential vs Commercial. Flip vs Buy-and-Hold. Arguably, one of the most enduring—and contentious—debates in the industry is local versus remote real estate investing.
It may surprise you to learn that the majority of real estate investors are actually out-of-state investors. With the advent of the Internet and the ability for investors to view and buy property from anywhere, out-of-state investing has grown in popularity.
Conventional wisdom might say to invest where you are, presumably so you can control the results better. However, modern sensibilities tell us that investing beyond our local markets may be more beneficial to the health of a buy-and-hold real estate portfolio.
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Two main reasons to invest out of state
1. Portfolio Diversification
The number one benefit of out-of-state real estate investing is portfolio diversification, pure and simple. Diversification happens on two different levels: how many assets you have and where those assets are. Holding more than one investment property helps you manage the risks that come from vacancies or personal property expenses. Meanwhile many investments can sustain your returns. At higher levels, shopping in many neighborhoods and markets continues to hedge against risk.
The economic factors shaping each market will change and differ. Demand will ebb and flow. There is a possibility of natural calamity. When you have assets in different markets, you can protect your entire portfolio from being affected by a hurricane, a legislative move, or an economic downturn. While these things rarely ruin a portfolio, they can hurt your returns and your forward momentum.
2. Strength
In addition to the benefits of diversification, affordability plays an important role in why investors choose to go beyond their local markets. The United States of America is vast and diverse. You’ll find that your dollar will go much further in a southern suburban market than in an urban coastal center. If you invest in Alabama instead of San Francisco, you’ll find yourself able to buy five properties for the price of one.
Being able to scale your portfolio more quickly means more diversification, less risk and a better rate of return. Your price-to-rent ratio will look much better in more affordable markets.
Of course, investing out of state is more complicated than that. Despite the obvious advantages, investors can make big mistakes by venturing into the wrong markets unprepared.
5 key properties to market out of state
1. Relative Strength
Relative strength is something we’ve already talked about in terms of benefits. However, this is also a quality to watch out for. Investing out of state isn’t enough – the numbers have to be checked. The biggest danger here is falling prey to the lure of “hot” markets. Prices will increase, hurting your price-to-rent ratio and ultimately, your cash flow ability.
That’s why it’s important to pay attention to market performance in terms of list price versus selling price. That’s why evaluation and monitoring matter. As a real estate investor, you want to take advantage of the relative affordability offered by the out-of-state market. If you only target “hot” markets — often with rapidly rising property values – you run the risk of a future crash.
Beware of overpaying, even if the market may, on the surface, be more affordable than your local market. You still want to make sure you’re paying for quality and a solid long-term investment, not just hype.
When considering relative affordability, consider the relationship between supply and demand, the potential for a housing bubble, and what you’re getting for your money.
2. Long term stability
No one said buy-and-hold investing was exciting. Rewarded, yes. exciting? not necessarily. When investing out of state, the more stable markets are where you want to put your money. While the fast and furious environment in a highly competitive market is exciting, you’ll likely pay more—not to mention the desire to “win” may cloud your judgment.
Consistency is the key here. While you want to target markets that see an upward trajectory in their performance (which we’ll cover momentarily), they also need to be among the fastest growing, most popular markets in the country to make solid investments. is not needed. Ideally, your out-of-state market will provide you with appreciating property values, increased rental demand, low vacancy rates and long-term residents.
When the market is more stable, residents are more likely to settle for the long term. Because affordability (in terms of both housing and the general cost of living) is increasingly an issue for Americans, this sense of stability is especially important.
A fast-moving market may be attractive for its energy and excitement, but it may not be the best investment solution when you intend to hold your assets for five or 10 years or more.
3. Investor Interest
While the hottest market can be a double-edged sword for real estate investors, overall investor interest matters when it comes to your market options. This is why networking is important for the real estate investor.
What are other investors doing? What areas are they interested in? Why? What is his success record?
Listen to other investors—you may discover market opportunities that were never on your radar before. This is especially true when you consider the real estate investing giants. Also, remember to evaluate other investors relative to you. What may be a great investment for someone who has more experience, higher risk tolerance and more resources may not be so great for a new investor with limited diversification and experience.
With that said, pay attention to where investors are going. Often, you’ll find that they move ahead of larger trends and capitalize on seeing positive markets.
4. Positive Economic Indicators
When evaluating any market for investment, the numbers really matter. You may feel an affinity for a market, hear the hype and see the success of others, but think twice if the numbers don’t check out. Each real estate market is linked to the broader economic market of the city or metro. The economy drives the health of the real estate market as a whole.
For real estate investors, your numbers are not limited to price-to-rent ratios, cash flow calculations and cap rates. All of these are important, but beyond your personal investment are the numbers that guide long-term success.
Some of these indicators are:
job growth
Job opportunities drive population growth. Population growth creates demand for real estate. When considering the local economy, investors may want to look at data such as job growth, the unemployment rate, median wages, and so on. If the job market is suffering, the real estate market will follow.
It also provides more insight into your residents: what they can (usually) afford in terms of their rental, what’s sustainable for the long term, and how long-term rentals are likely to retain residents.
industry diversification
Houston, Texas, is a prime example of why industry diversification matters in real estate investing. In the 1980s, an oil crash was absolutely devastating to Houston’s economy. It was the accident against which all other accidents are compared. Many of Houston’s banks were on the verge of closure. Real estate collapsed due to overbuilding.
Over the past several years, we have seen other oil accidents. some of which compared to the dismal decline in the 1980s. However, we have not seen the level of devastation in Houston that one would have expected in the past. In fact, several otherwise significant accidents in the oil and gas industry have not defeated Houston.
This is because, in the years following the collapse of the 80s, the market diversified. Rather than being highly dependent on oil, oil is one of several important industries that support the market and its employment opportunities. Because of this, a decline in the oil industry has a massive effect on the economy. This is simple diversification.
population growth
Is your market growing? Population growth over the years, even decades, is a positive indicator for real estate investors. Population growth is naturally linked to job opportunities and the health of the local economy.
Pay attention to these trends, as increased demand for real estate tends to reduce vacancy duration. Not only this, but population growth is a sign that the market is where people want to be. Whether it’s for good jobs, a good cost of living, or a conducive family environment, population growth means you’re likely to find an abundance of potential residents, especially those who are in it for the long haul. Are.
the cost of living
Debate about whether or not we are currently in a housing bubble rage. Regardless, we do know that we are in the midst of a new economic downturn, thanks to the COVID-19 pandemic and its economic fallout. Remember, real estate is intrinsically linked to the economy.
While we have seen 2020 real estate defy all expectations, it cannot completely escape the economic impact we have seen this year and what is yet to come. Experts have argued that we are in the midst of the great affordability crisis, a theory that was presented well before the pandemic was fully known to the United States and was plunging us into recession. Healthcare and housing costs are two major issues pushing American families to the brink.
Because costs across the board are outpacing wage growth, it only makes sense that Americans are struggling to make ends meet. This is why targeting affordability, not only in terms of property acquisition, but also in terms of staying in the market, makes sense for investors. The more unsustainable the market becomes, the fewer people can hold on for long. It is not sustainable. At the same time, the cost of living is more favorable in some markets than in others compared to wage growth. This is one metric that real estate investors should pay attention to.
median home value
While the indicator so far has been more related to the economy than real estate, home values matter too. Real estate investors — especially buy-and-hold investors — benefit from their investments in more ways than they realize. Cash flow is only part of the equation. Median home values and their trends over time can help investors know what to expect in terms of property appreciation.
5. A Supporting Structure
As important as the economy, affordability and stability of the market are, they pale in comparison to an investor’s support structure. Can check your numbers. Investments can be really and really solid. You can have all the pieces. But if you don’t have a proper support system, you can still fail.
Out-of-state investors cannot ignore this. They, more than local investors, need a quality, reliable team to manage and maintain the property. You need a team that can quickly and forcefully address residents’ concerns and property issues. So many real estate investors enter into management deals in the hopes that it will save them money and improve their cash flow.
While on paper it may seem so, you are suffering without the right structure.
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Hiring the Right Team
An experienced, hardworking team of professionals who can help you identify the right properties (at the right prices), invest in the right markets and manage the assets you own. This support structure is much more than just a management team.
Many out-of-state investors prefer to go with a turnkey company. Still, a turnkey company—people who should help you secure your capital through diligent advice, maintenance, and management—can add to your support infrastructure by connecting you with trusted lenders and local vendors. This ensures that you are getting the best financing and the best work done towards your property.
At least, it should be so.
Before you invest out-of-state and start looking at numbers and market indicators, find the right partner to turn your investment into a long-term, sustainable asset.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
