Take a glance at today’s headlines, and you’ll be inundated with stories about rising mortgage rates and surging home prices. All of this is true—interest rates are the highest they’ve been in more than 20+ years, and homes across the country are more expensive now than ever before.
Despite these challenges, real estate remains a popular investment choice among American adults. A poll conducted by Gallup in April 2023 revealed that 34% of respondents identified real estate as the best long-term investment, surpassing gold (26%), stocks and mutual funds (18%), savings accounts and certificates of deposit (13%), and bonds (7%).
Although Americans are optimistic about U.S. real estate, the country’s myriad markets are far from homogeneous. Some investors—especially those residing in expensive, coastal locales—may realize that their home states do not offer the best investment opportunities, and will instead turn to other markets with more affordable properties, higher rental yields, and more favorable regulations. Identifying a target market that features affordable markets and high rental demand is crucial for maximizing returns and finding the best investment opportunities.
This nationwide search for greener pastures has fueled an uptick in out-of-state investments, as investors are drawn to hot markets that offer strong growth potential and the chance to build wealth. In the second quarter of 2022, these purchases accounted for 2.1% of all U.S. home sales, up from 1.5% in 2019.
That said, out-of-state investing remains shrouded in skepticism and misconceptions, which can deter potential investors from making informed investment decisions. Here are a few common myths about out-of-state investing—and whether they hold up to closer scrutiny.
Myth: It’s too risky
One oft-mentioned idea among landlords is that investing in far-off markets comes with increased risk. This claim is not without merit. Investors who purchase properties out of state cannot readily access their properties in person and must contend with unfamiliar places, laws, and demographic trends.
But categorizing all out-of-state real estate investments as inherently risky is an oversimplification. In reality, every real estate investment—whether it’s down the street or hundreds or even thousands of miles away—carries some level of risk. The key to successful real estate investing, thus, isn’t to avoid risk altogether—it’s to understand and manage it effectively. Successful out-of-state investing requires careful planning and a thorough understanding of the local market to evaluate opportunities and minimize potential pitfalls.
Performing proper due diligence on a prospective city, neighborhood, and property before purchasing it is one effective risk management strategy. Platforms like Zillow, Realtor.com, and Niche, for instance, offer a wealth of metrics on housing markets, neighborhoods, schools, and property tax rates across the country, allowing out-of-state investors to make informed decisions on where to buy—even if they don’t live there themselves.
Investors can also leverage resources such as the Statistical Atlas and the National Realtors Association’s database when performing market and demographic analysis. Strategic planning is essential to mitigate risks such as local economic downturns, and these tools provide insights into factors like property values, rental rates, occupancy rates, and crime levels—along with demographic data such as population growth, job growth, unemployment, migration, and more.
Real estate investors concerned about being unable to manage their properties in person can even collaborate with a reputable turnkey provider based in the state they plan to invest. Turnkey companies conduct extensive market research, lease properties, handle rent collection, deal with maintenance, and pay bills—providing out-of-state landlords with a hands-off and de-risked investing experience. When acquiring an investment property, thorough research is crucial to ensure long-term success and minimize unforeseen challenges.
Myth: Property management is difficult and expensive from afar
Self-managing a property is difficult. So-called “landlording” requires meticulous attention to detail and around-the-clock response times. For investors seeking minimal involvement, turnkey properties offer a solution by providing fully renovated, ready-to-rent homes that are professionally managed, allowing investors to generate passive income with minimal ongoing effort.
However, the notion that it’s prohibitively expensive to work with a property manager—which nearly all out-of-state investors hire—is a misconception. Property management costs aren’t intrinsically tied to the owner’s location but instead hinge on factors such as a property’s location, size, and the scope of services provided. For out-of-state investors, partnering with a local property management company or reputable property management companies is essential for effective oversight and local market expertise.
Thanks to online tools, remote property management is not only possible but also streamlined and cost-effective. Investors can now make use of landlord apps like Landlord Studio or RentTracker to automate tasks, oversee tenants and contractors, track incomes and expenses, and access real-time financial reports. These tools also support ongoing management and make it easier to collect rent. Prudent out-of-state investors will also establish a network of local contacts like contractors, landscapers, real estate agents, and attorneys that they can rely on for help.
For a more hands-off approach, investors can work with a turnkey property management company. It’s common to do so: Over 60% of investors in the U.S. delegate their “landlording” responsibilities to a property manager. By letting a property manager handle marketing, leasing, rent collection, property maintenance, and legal issues, out-of-state landlords can enjoy a fully passive approach to real estate investing. Local property managers play a crucial role in helping investors generate passive income by ensuring smooth operations and tenant satisfaction.
Myth: Home is always safer and more profitable
It’s tempting to think that familiarity translates to safety. While an investor’s local real estate market may be a desirable place to live in, local markets are not immune to economic cycles’ ebbs and flows. Many investors choose to diversify by purchasing out-of-state property in different real estate markets, seeking opportunities that may not be available locally.
Economic downturns, shifts in employment patterns, and changes in local industries can all affect property values and rental demand. Commonly, investors who live in an area may not have scrutinized their hometowns using these metrics before, and it’s precisely because they live but don’t invest.
By considering out-of-state locales, investors broaden their choice set and unlock access to markets that may offer higher appreciation potential, stronger rental yields, or more favorable investment conditions than their hometowns.
In addition, by diversifying across different regions, states, and cities, investors can hedge against local economic challenges or market-specific issues. When one market struggles, others may thrive, which helps balance out an investor’s short-term returns. The benefits of owning rental property in multiple locations also come with responsibilities, such as ongoing management and understanding varying legal requirements.
Myth: Out-of-state investing is only for wealthy and experienced investors
Investors may believe that they need significant wealth to become a landlord. Luckily, becoming a real estate investor—either in-state or out-of-state—is an attainable goal, even for middle-class Americans. Rental property investing and buying rental property out of state are viable options for a wide range of investors, offering flexibility and accessibility regardless of location.
While it’s true that having more capital can expand an investor’s options (e.g., they can consider multifamily properties, office buildings, industrial warehouses, and other institutional-scale assets), the abundance of mortgage financing options and fairly affordable real estate—especially in Sunbelt states—significantly lowers the barrier to entry for mom-and-pop investors considering single-family rentals. Alternative strategies such as purchasing investment properties or participating in real estate syndications also provide accessible paths for those looking to diversify their real estate portfolios.
The belief that only experienced investors can succeed in out-of-state markets similarly neglects the invaluable resources and support available to newcomers. This includes books, online courses, webinars, podcasts, and mentorship programs that can help less experienced investors gain the knowledge they need to succeed in out-of-state investing. Newcomers can also learn how to find and close a real estate deal and benefit from reviewing all the deals completed by experienced investors to understand proven systems and strategies.
The rise of turnkey companies has also leveled the playing field. These companies handle all aspects of hands-on “landlording”, which makes it easier for novice and seasoned investors alike to own rental properties—no matter where they’re located. By leveraging these strategies, investors can work toward achieving financial freedom through real estate.
Myth: Investing out of state increases your tax burden
Investing away from home does involve additional tax considerations and paperwork, but it doesn’t necessarily increase your tax burden. When you own a rental property in another state, you’re generally required to file two state tax returns: a non-resident return for the state where the property is located and a resident tax return for the state where you live. Down payment requirements and property taxes can also vary significantly between states. For example, South Carolina is known for its favorable property taxes, which can improve investment returns and lower your initial costs compared to higher-tax states.
To avoid double taxation, however, most states offer a tax credit for taxes paid to another state. Thus, while you might be paying taxes in two states, you’re not being taxed twice on the same income. Real estate investing also offers tax advantages, such as deductions and depreciation, that can enhance your returns. State income tax rates will also vary. Some states have no income tax; others will have lower or higher rates than your home state. Before investing out of state, talk to a tax professional so that you’re fully aware of the compliance and tax obligations, as well as the potential tax benefits of doing so, and make sure you understand all local regulations that may affect your investment.
How to Conduct Effective Market Research and Analysis
For real estate investors considering out-of-state opportunities, thorough market research and analysis are the foundation of a successful investment strategy. Start by gathering data on the local real estate market, focusing on trends such as job growth, population growth, and rental demand. Understanding the local economy—major industries, employment rates, and average income levels—can help you gauge the potential for rental income and long-term property appreciation.
Dive into the specifics of the local real estate market by analyzing property values, rental rates, and vacancy rates. This information will help you assess the competitiveness of the market and estimate your potential returns on investment. Online resources, including local MLS listings and real estate websites, are invaluable for tracking market trends and identifying promising neighborhoods.
Don’t underestimate the value of local expertise. Consulting with local real estate agents and property managers can provide insights that online data alone can’t offer. These professionals understand the nuances of the local market and can help you spot opportunities or pitfalls that might not be obvious from a distance. By combining online research with advice from local experts, real estate investors can make informed decisions and find the right rental properties in any out-of-state market.
The Power of Building a Local Team
One of the most important steps in successful out-of-state real estate investing is building a strong local team. A reliable property management company is essential for handling the day-to-day operations of your rental properties, including rent collection, property maintenance, and tenant communications. This allows you to enjoy the benefits of real estate investing without being physically present.
Partnering with a knowledgeable local real estate agent can give you a competitive edge when searching for potential rental properties. Local agents have firsthand knowledge of the market and can help you identify high-demand neighborhoods, negotiate deals, and navigate the buying process. Additionally, having trusted local contractors and handymen ensures that property repairs and maintenance are handled promptly and professionally.
Don’t overlook the importance of local professionals such as attorneys and accountants, who can help you understand and comply with local laws and regulations. By assembling a dedicated local team, you can effectively manage your out-of-state investments, minimize risks, and maximize your returns—no matter where your properties are located.
Leveraging Online Resources for Out-of-State Investors
The rise of online resources has revolutionized how real estate investors approach out-of-state rental properties. Platforms like Zillow, Redfin, and Realtor.com provide easy access to local MLS listings, enabling investors to research the local market and evaluate potential properties from anywhere. These tools make it possible to compare property values, rental rates, and neighborhood amenities with just a few clicks.
Property management software has also made remote management more efficient than ever. With features for tracking rent payments, handling maintenance requests, and scheduling property inspections, investors can oversee their rental properties without being on-site. Social media groups, online forums, and networking platforms connect investors with local real estate agents, property managers, and other investors, fostering collaboration and knowledge sharing.
By leveraging these online resources, real estate investors can streamline every stage of their investment journey—from finding and analyzing properties to managing ongoing operations—making out-of-state investing more accessible and manageable than ever before.
Protecting Your Investment: Insurance and Risk Management
Safeguarding your out-of-state rental properties requires a proactive approach to insurance and risk management. Real estate investors should secure comprehensive insurance coverage, including property insurance, liability insurance, and umbrella policies, to protect against unexpected events and potential liabilities.
Regular property inspections and timely maintenance are key to preventing costly damage and reducing risk. Establishing a risk management plan that addresses natural disasters, tenant disputes, and market fluctuations can help you respond effectively to challenges as they arise. Diversifying your investment portfolio—by owning multiple rental properties or exploring different asset classes—can further reduce risk and enhance financial stability.
By prioritizing insurance and risk management, real estate investors can protect their assets, maintain steady cash flow, and build long-term wealth through out-of-state investments.
Planning Your Exit: Strategies for a Profitable Transition
A well-planned exit strategy is essential for maximizing returns when it’s time to sell your out-of-state rental property. Start by defining your goals, whether that’s achieving a specific return on investment or selling within a certain timeframe. Stay informed about local market trends, including property values and rental demand, to identify the best time to list your property.
Develop a comprehensive marketing plan that includes staging the property, setting a competitive price, and promoting it to attract qualified buyers. Consider the tax implications of your sale, such as capital gains tax, and explore options like 1031 exchanges to defer taxes and reinvest your profits.
By planning your exit with care and leveraging local market insights, real estate investors can ensure a smooth, profitable transition and make the most of their out-of-state rental property investments.