My wife and I are planning to purchase our first out of state rental property sometime in early 2020. The process was extremely intimidating at first, but in our search some very important principles have become clear. Solely investing locally has plenty of drawbacks, especially in overpriced or shrinking markets (like much of our home market of Chicago).
The advantages of investing out of state are often quite obvious. However, losing sight of these advantages combined with fear can stop investors from ever moving out of their local market.
There is Limited Inventory in Your Local Market
Even if you currently are in a strong market, there are only so many properties to go around. And if it is a strong market now, there is no guarantee that it will remain a strong market indefinitely.
The strongest markets can rise in price very quickly to where many investors are priced out or it simply does not make sense from a cash flow perspective. When that inventory is gone, it can be difficult to find reasonable deals without getting extremely creative or taking big risks.
Investing in multiple areas also works as a way to diversify your real estate holdings. That way, even if one particular market does poorly, your whole portfolio can still perform well. Spreading holdings across different cities and states can prevent your portfolio from getting devastated by a bad recession in a certain market.
You Can Access the Best Performing Markets
Chances are you are not in the best market nationally. Because of that, you could be making a lot more elsewhere.
If you are struggling to find deals at a 5% return in your local market but can find reliable 10% return deals elsewhere, the choice of where to invest seems obvious. Other markets might have better long-term economic statistics, especially population growth. As more people enter the market, rents often go up faster than developers can add supply. This is an added “bonus” return that you might not have available in your current market.
Furthermore, if you are in a market like Chicago, San Francisco, or New York, you can also escape many of the unnecessary regulatory hurdles and extremely high taxes by investing out of state. This can make life as an investor much easier, even if you are far away from the actual building.
The opportunity cost of missing out on those out-of-state profits is a risk in itself. Do not ignore the fact that there are almost certainly better markets elsewhere that you could be investing in!
Remote Investing Forces You to Systematize
Perhaps the biggest benefit to investing out of state is that you must create reliable systems to be successful. This is not necessarily the case with local investing where you can rely on your own labor as a crutch.
With out of state investing, you will need to find a good property manager and keep strong communication with them at all times. You need to rely on other people to check up on your property and manage minor repairs and rehabs. Long distance real estate investing is a team game.
Simply put, you can’t be there yourself. But you still have to figure out a way to fix any problems with your properties quickly. This is why you need to build a good team and have reliable contacts who can maintain your buildings. Investing out of state forces you to think about how to appropriately delegate tasks since there is not a choice to just “do it yourself.”
The sooner you can form a cohesive team and systematize your rental property management, the sooner you can start scaling. When you can effectively delegate tasks, there is no defined limit to how big your portfolio can get. Your own time is no longer a limiting factor.
A Business Centered Around You Is Hard to Scale
There are only so many things that one person can do in a given day. Restricting yourself to just your local market because you need to be onsite in a moment’s notice is not a recipe for large-scale success. It can certainly work with a handful of properties, but probably not very many more.
When you do everything yourself in actively managing your properties, you place a very strict ceiling on your ability to scale. If you only have time to take care of 10 rental properties, you will only be able to own 10 rental properties.
By delegating your tasks and building a good team, you are essentially multiplying your time. If you can hire someone who is able to manage 10 more rental properties, you’ve just doubled your total capacity. Hiring more people should increase your capacity to invest even further.
Of course, some people genuinely enjoy property management and would prefer to control everything themselves. However, those individuals must recognize that that business has a clear limit for as to how big it can get.
Risks of Investing Out of State
Of course, investing out of state is not without risks.
The most obvious risk of out of state real estate investing is that, well, you’re not there. This really only becomes a problem if you do not have a reliable property manager. However, even if you have a good manager, that manager may end up switching firms or career paths entirely at any moment. As a result, you might need to quickly react to fill any void in your team.
Similarly, you might not be as familiar with some of the nuances of the local market. If your property manager is not fully comfortable with them either, you could find yourself in a tough spot!
Having to hire out third parties to take care of the property can be quite expensive as well. Generally, property managers will charge somewhere between 8 and 10 percent of the monthly rent roll. They might charge fees for other things, too. These fees can eat into profits significantly, but, by investing in a better market out of state, you should have more room for profit to begin with. You also get to save a lot of your own time which can be multiplied with efficient team building, as mentioned above.
As much as you want to distance yourself from your investments to create true passive income, you are ultimately relying on other people who might do a poor job or somehow leave you hanging. Definitely take this into consideration before investing out of state!
Conclusion
If you believe that you can only invest locally, you are likely preventing yourself from getting the best deals and limiting your ability to scale your real estate portfolio. Even if it might be more expensive to manage out of state rental properties, the potential for profits should be higher in the first place. Perhaps most importantly, investing out of state encourages you to find ways to systematize your business and delegate tasks to free up your time.
In short, fear of investing out of state is holding you back. You can open the door to significantly better deals by looking outwards. However, no matter where you invest can you replace solid fundamentals and the need to understand what a good deal looks like. If you are unsure of where to start, check out this free rental metrics calculator that you can use to analyze the numbers on deals. Numbers rarely lie. Once you are confident in analyzing rental deals, you can rapidly scale your portfolio with both in and out of state real estate investing.