The old adage “The grass is always greener on the other side” can apply to a lot of situations in life. The fact is, to maintain the greener grass, you have to know how and what it takes to nurture it. You also either have to visit the “greener” lawn occasionally or have someone qualified to take care of it.
This concept also applies to real estate investing. A lot depends on your due diligence and having a network of folks with “boots on the ground” at your location afar that are experienced, knowledgeable and trustworthy. These factors can be the difference between success and failure.
Investing Out of Town or Local Area
The Good Stuff
Let’s talk about why you might try to invest elsewhere and some of the upsides:
- Affordability. There are some markets (e.g., San Francisco) where property prices are out of sight and make breaking even difficult at best. A new area just might have better and more reasonable property prices that fit your business model and thus make a better investment.
- Availability. In “hot” real estate markets, it’s easy to sell, but it can be difficult to find and purchase a property at a price that makes sense for your business model.
- Diversifies Your Portfolio. It’s the case of not putting all of your eggs in one basket. For some investors with a lot of properties, investing in another location may make a lot of sense. If one area goes flat, there is another area that possibly is still performing.
- Market Timing. Timing can be essential! Keeping an eye on markets that aren’t as hot as your local market (but are headed that direction) could get you some great deals.
- Taxes. Taxes can be a prime consideration for investing in an area, whether it’s state, local or property taxes. More on this in a bit.
- Return on Investment. Sometimes your ROI can be enhanced by investing elsewhere. In some areas properties can be bought cheaply but still rented for nearly the same rates as a hot area, resulting in great cash flow!
Let’s chat about some of the downsides of investing in non-local areas:
- Unfamiliarity with Outside Market. You absolutely have to know your potential market, inside and out. If you don’t know and/or don’t have a knowledgeable and experienced team, this could really come back to bite you.
- Lack of Knowledge on Local Laws and Regulations. Having a handle on the local laws and regulations is imperative. You not only want the investment to work for you, you want to stay out of legal trouble.
- Distance to Properties. We will talk a bit later about having a local “team” of knowledgeable and experienced folks in your distant area. The last thing you want or need to do is to have problems when you live a distance away and can’t take care of a pressing issue right away.
- Taxes. Real estate taxes, income taxes, property taxes and other expenses (e.g., HOAs) can really put a dent in your profit. Folks invest all the time in areas where the taxes can be burdensome, but you have to know in advance and figure them into your expenses.
- Entities. Entities can vary from state to state, especially the costs. Some entities such as Colorado cost only about $50 to set up and $10 a year to maintain. Other states can have fees of several hundred dollars, annually. Once again, if you know what you are dealing with you can put the expenses into your deal.
Putting Together a Team For Out Of Town Investments
Having a great team of folks that live and work in your new investing area is paramount to your success if you don’t want the hassle and expense of traveling to and from your investment properties frequently. Be picky and interview several candidates for each area of expertise. You may find the need for additional types of team members than listed here. Here is a short list:
- Real estate agent
- Property Manager
- Property Inspector
- Contractor and Handyman
- Bankers and Hard Money Lenders
- Insurance Broker licensed in the local area
- A local partner
Depending on your experience, investment strategies and business model, investing in areas outside of your local area may make sense. Like any real estate investment, you have to do your due diligence and have a team experienced in your local area that you trust.
Finally, one of the biggest mistakes that investors make is that they get in a comfort zone and assume that “no news is good news” from their out-of-state team. It is your responsibility to always keep your finger on the pulse of what is going on in that area. Make sure that your team communicates well, often and accurately. Make sure to keep an eye on the numbers, as they can change as the local market changes.