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 showed that 34% of respondents named real estate as the best long-term investment—above 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 provide the best investing opportunities, and will instead turn to other markets with more affordable properties, higher rental yields, and more friendlier regulations.
This nationwide search for greener pastures has fueled an uptick in out-of-state investments. 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 continues to be shrouded with skepticism and misconceptions, which can discourage 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.
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. 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.
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.
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.
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. 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.
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.
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 there.
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.
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.
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 lower the barrier to entry for mom-and-pop investors considering single-family rentals.
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.
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.
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.
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.
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.