Investing in real estate outside of one’s home state, also known as out of state investing, is a strategy that more investors are utilizing. There are several potential benefits to investing out of state such as greater cash flow, appreciation potential, and diversification. However, there are also risks like not being familiar with the market, relying on property managers, and challenges with maintaining the property. When done right, out of state investing can be a solid addition to an investor’s overall real estate portfolio. Key factors to research before investing out of state include population and job growth, rents and home values, property taxes and landlord-tenant laws. Consulting experienced local real estate professionals is also recommended.
Out of state investing can provide higher returns and appreciation potential
Many investors look to out of state markets that are experiencing strong population and job growth, leading to rising demand for rentals and upward pressure on home values. Fast-growing cities like Austin, Nashville and Charlotte often provide better cash flow and appreciation potential compared to slower growth markets. Investors should research markets’ employment rates, industries and major projects to identify promising markets.
Out of state investing allows for diversification of one’s portfolio
Investing in multiple geographic markets provides more diversification versus owning properties concentrated in one area. If there is an economic downturn in one market, the others may be less impacted. This geographic diversification can reduce overall portfolio risk. Investors can also diversify across property types by investing in single-family homes, multifamily properties, storage units, etc.
Challenges include less familiarity with the market and reliance on others
A major downside to out of state investing is lack of familiarity with the market, from neighborhoods to costs. Investors must rely on extensive research and trusted professionals for boots-on-the-ground insights. Hiring a property manager is crucial but requires diligent vetting, oversight and communication. Maintenance and repairs also become more difficult from a distance.
Out of state investors should understand tax implications
There can be tax benefits to investing out of state but also tax obligations of which to be aware. If the property is the investor’s primary residence, capital gains tax may be avoided. But if rented out, the investor must file taxes in that state. Depreciation deductions may help lower tax liability. Consultation with a tax expert is strongly recommended.
Out of state real estate investing can enhance returns but requires extensive research and reliable partnerships. When executed properly, it can improve portfolio diversification and cash flow. However, lack of market familiarity and reliance on others pose risks investors must address.