When the average retail investor thinks about real estate as an investment, their mind typically goes to local single-family properties within a 20-30-minute radius of their personal home. In other words, they think convenient, familiar, and nearby. And while this is the natural place for most people to start, it’s not the only option.
If you limit yourself to only investing in real estate on a local or in-state basis, you may be missing out on some amazing opportunities that could set you up for increased success.
Out of state real estate investments, while they certainly come with their own nuances and challenges, offer a long list of benefits and advantages that could help boost your portfolio and increase your ROI.
In this article, we’re going to explore some of the benefits of investing in real estate out of your home state and in many cases without even visiting the properties, and when you should consider it as an option for your own portfolio.
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The Major Benefits of Out of State Real Estate Investments
We’re not going to sit here and tell you that you should not invest in local real estate.
In fact, if we’re being honest, this is probably where you should begin. But as your portfolio grows, you shouldn’t be afraid to expand your horizons and look beyond your zip code or state.
Here are several reasons why out of state investments make a lot of sense for real estate investors who want to spice up their portfolios with more options.
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Access to Better Markets
One of the biggest benefits of investing out of state is the ability to tap into markets that are performing better than your local area. Real estate markets vary widely from one region to another, and some areas may offer better investment opportunities due to factors like job growth, population increase, or economic development.
For example, if your local market is stagnant or declining, you might find more attractive opportunities in a state that’s experiencing rapid growth. States with booming industries, new infrastructure projects, or a strong influx of residents often have real estate markets that are ripe for investment.
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Portfolio Diversification
As any good investor knows, diversification is your greatest form of downside protection. And while you might already be diversified in your local market – including different property types, price points, and neighborhoods – you still have all of your proverbial eggs in a single basket (in the form of a single market). What happens if you find out that your city is in a real estate bubble? What if there are major changes in state tax laws? Or what if a huge storm comes through and destroys all of the properties in the area?
Diversification comes in all different shapes and sizes. This includes geographical diversification in the form of different states and regions of the country. When you invest in different states, you reduce your overall risk by spreading out the impact of economic challenges, natural disasters, tax laws, and other factors that could sink any isolated market at any given time.
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Potential for Higher Cash Flow
Another major benefit of investing out of state is the potential for higher cash flow. In some markets, especially in high-cost areas, property prices are so high that it’s challenging to find properties that generate positive cash flow. However, in other states, property prices may be lower, and the price-to-rent ratio may be more favorable, leading to better cash flow.
The price-to-rent ratio is a big one to watch when you’re considering which states to invest in. This calculation takes Median Home Value ÷ Median Annual Rent. The resulting number is the price-to-rent ratio, which tells you how strong the investment potential is for a given area.
In terms of low price-to-rent ratios, cities like Detroit, Memphis, Milwaukee, El Paso, Baltimore, and San Antonio are among the best. Those with the highest ratios – meaning the worst for finding deals on properties – include San Francisco, Oakland, New York, San Jose, Los Angeles, Seattle, and Long Beach.
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Capitalizing on Emerging Markets
Some of the best real estate investment opportunities you’ll find are in emerging markets. These are areas that are experiencing a lot of growth and development, but that might not be on most people’s radars on a national level. These areas can offer much lower entry prices with the possibility for significant long-term appreciation as more development occurs.
By carefully and diligently researching emerging markets in other states, you can find “diamonds in the rough.” You’ll have to do your own research on what makes sense for you, but examples over the past few years include several towns in the southeast, like Huntsville, Alabama and Greenville, South Carolina.
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Avoiding Overheated Markets
On the flip side of things, investing out of state allows you to avoid the classic mistake of over-investing in a market that’s become too saturated. If your local market is like many others, it’s become very difficult to find the same kind of deals today that you could five to seven years ago. And if you continue to force your hand, you may end up diving into deals that don’t make much financial sense.
By investing in out of state properties, you can escape an overheated market and find fresh options. You’ll be surprised to learn how much more balanced the market can be in other areas. (In fact, there are still parts of the country where properties are severely undervalued.) This is something you won’t know until you go beyond your state’s borders and look for new options.
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Tax Benefits and Incentives
Different states have different tax laws, and by investing out of state, you may be able to take advantage of tax benefits and incentives that aren’t available in your home state. Some states offer tax incentives for real estate investors, such as lower property taxes, tax credits for certain types of investments, or incentives for investing in specific areas.
For example, some states with lower property taxes can improve your cash flow, while others might offer incentives for investing in designated Opportunity Zones, which come with significant tax advantages. By exploring these tax environments in different states, you can identify opportunities to minimize your tax burden and maximize your returns. That’s a win, no matter which way you slice it!
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Taking Advantage of Local Expertise
One of the concerns many investors have about investing out of state is the challenge of managing properties from a distance. However, by leveraging local expertise, this isn’t really as big of an issue as you might think it is.
When investing out of state, it’s important to build a reliable team of local professionals, including property managers, real estate agents, contractors, and attorneys. These experts can provide you with the on-the-ground support you need to manage your properties effectively. They can handle everything from finding and screening tenants to maintaining the property and ensuring compliance with local regulations.
With the right team in place, managing out-of-state properties can be just as straightforward as managing local ones. In fact, many investors find that with professional property management, they don’t need to be physically present to successfully operate their out-of-state investments.
Don’t Limit Your Options
You will always face natural limitations to what and where you can invest. There’s no need to place additional “artificial” limitations that hold you back even more. While it’s perfectly natural to begin your real estate investing journey with properties that are in your town or state, investing in out of state properties in other areas of the country can yield a number of benefits – including the ones we’ve highlighted above.
By taking the time to do your research and explore new markets, you can begin expanding your portfolio one property at a time. And if you’d like some help and support along the way, our team would be happy to help.
At Invest.net, we help both domestic and foreign investors diversify their portfolios with real estate— unlocking equity growth, asset appreciation and tax benefits of real estate by investing in turnkey rental properties. Contact us today to learn more!
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