Should You Invest Locally or Long Distance?

Though long-distance investing can help you get started, remember it comes with its own risks.

When getting started in real estate investing (REI), deciding on the right strategy from the beginning is crucial. So, you might wonder if long-distance real estate investing is worth it. Sometimes, buying a rental property out-of-state opens many lucrative property investment opportunities. Or maybe you want to get started in real estate investing but live in an expensive city or neighborhood. Though long-distance investing can help you get started, it’s good to remember it comes with its own risks.

What are the pros and cons of “out-of-state real estate investing”? Is this a strategy you should consider when becoming a real estate investor? Or is investing locally better for real estate rookies? And how can you achieve your financial goals if you decide to become a long-distance investor? This article answers these questions and more. We’ll cover:

• What is long-distance real estate investing?
• Should rookie investors buy a house out of state?
• Reasons why investors choose to buy out of state
• Pros of long-distance investing
• Cons of long-distance investing
• Local vs. long-distance investing
• Tips for long-distance investors
• Using BiggerPockets Rental Property Calculator
• How to find profitable out-of-state properties
• Is long-distance investing really worth it?

What is Long-Distance Real Estate Investing?

Long-distance real estate investing refers to buying a rehab or rental property outside your local real estate market. The property could be a few hours’ drive or in a state hundreds or thousands of miles away. 

When investing out of state, it is common to use a good property manager, especially if you have several rental properties far from your home. A few other key team members will round out your “Core 4”; you’ll want an investor-friendly agent, a good lender, and a local contractor. 

Long-distance real estate investing can be used with any strategy — wholesaling, fix-and-flips, buy-and-hold rental properties, even short-term rental properties. However, buy-and-hold tends to work best for most long-distance investors due to the distance involved.

Should Rookie Investors Buy a House Out of State?

Is long-distance investing worth it if you start investing in real estate? Buying property for investing can be challenging at the best of times, and buying real estate in a distant location has unique challenges. However, that doesn’t mean it’s impossible for rookie real estate investors.

Like any successful investment, preparation and the right strategy are key factors for enjoying positive cash flow. Therefore, it is crucial to carry out due diligence as you would when buying property in your neighborhood. This means checking out the local real estate market trends, having a solid investment strategy, and networking with the right people.

The good news is that many first-time investors succeed when buying a long-distance investment property.

Reasons Why Real Estate Investors Choose to Buy Out-of-State Properties

There are several reasons why many investors choose long-distance real estate investing. For example, the local housing market could be too expensive to get started in real estate investing. Therefore, looking for cheaper real estate markets could increase opportunities to buy property.

It is common for real estate investors to start long-distance investing to diversify their portfolios. This means that the entire investment portfolio is not at risk if one local real estate market has a downturn.

It is also common for first-time investors to start investing long-distance with a vacation home. This allows them to use their second home for vacations and earn money from short-term rentals as remote landlords.

Pros of Long Distance Real Estate

Deciding to stay in the local real estate housing market or buy a house out of state can be tricky. So, what are the benefits and pitfalls of becoming a long-distance investor? Let’s consider factors to help you make an informed decision.

Buy property in more affordable real estate markets

One of the greatest benefits of buying a rental property out of state is access to more affordable housing markets. This can be a great investment strategy if your local market is too expensive or has low returns on investments. You may be able to buy a cheaper property in a better neighborhood a few hundred miles away.

For example, consider how much a single-family home would cost in an expensive neighborhood in San Francisco. Then compare that with the cost to buy a similar property in the Midwest, where property prices and taxes are lower. Therefore, your investment cash may go further buying out of state.

Greater return on investment (ROI) and better cash flow

Due diligence on various housing markets could identify areas with a greater return on investment. And it is not just being able to purchase a larger property for a lower down payment that affects your investment. ROI depends on the local market’s health, high rental market demand, appreciation rates, and many other factors.

Diversify your investment portfolio

Many real estate investors buy out-of-state properties to diversify their property holdings. Diversification makes financial sense with any type of holding. And with real estate investing (REI), it is the same. Buying properties in different markets can protect your overall investment.

For example, suppose all your rental properties are located in a single neighborhood. What happens if the rental market goes flat and it’s difficult to fill vacancies? In that case, you could experience significant cash flow problems and other issues.

Invest in markets with fewer restrictions

Other investors go “long-distance” because some states have friendlier conditions for landlords and investment property owners. For example, any of the following factors could make long-distance real estate investing attractive:

• Cheaper property taxes
• More flexible tax laws
• A better job market and higher employment rates
• Landlord-friendly real estate laws
• Property maintenance costs may be cheaper
• Demand for rental properties could be greater
• Lower operating expenses
• High projected population growth

Of course, extensive due diligence is necessary before deciding to purchase affordable properties in other cities or states.

Cons of Long-Distance Real Estate Investing

When starting out in real estate investing, there are several risk factors when buying an out-of-state property. Learning how to invest in real estate is a steep learning curve in itself. Therefore it makes sense to consider some of the potential pitfalls.

Unfamiliarity with local markets

Not being familiar with the local market is a significant challenge. This fact can make finding a suitable investment property in another neighborhood, city, or state difficult. Furthermore, in some cities, real estate dynamics change from area to area — even from street to street. Therefore, it takes work to hire proficient local real estate agents or property managers to assist you.

Reliance on property managers

When you purchase a property in another city or state, you must ask the question — who will manage the repairs, contractors, and tenants? Out-of-state real estate investing usually requires using property management companies to assist. These additional property management fees can eat into your profit margins.

Long-distance real estate investing can be more time-consuming

Apart from the extra time to carry out due diligence, managing out-of-state properties takes significant time. Even with the best property manager in the world, you still need to schedule regular visits to check the property. Then there may be unscheduled visits due to emergencies you may have to deal with.

Local vs. Long-Distance Real Estate Investing

Most real estate investor startups look to purchase properties locally. And there are several advantages to staying local when you start investing in real estate. Typically, you have an excellent working knowledge of the local real estate market and know which neighborhoods are good and which ones to avoid. 

Another huge advantage of local real estate investing rather than long-distance is that it’s more straightforward. It is easier to build a local team and inspect properties nearby. Also, you probably better understand local tax laws and landlord legislation. 

Even in expensive markets, it is possible to invest in real estate by house hacking. This strategy involves purchasing a property, living in one part of it, and renting out the other part. For example, you could arrange real estate financing to purchase a duplex and live in one unit. Then, you find a tenant to live in the other one. In many cases, the monthly rent can pay your mortgage. 

Tips for Long-Distance Real Estate Investors

If long-distance real estate investing is for you, what steps should you take to be a successful investor? Here are some tips for buying the right property: 

• Research the property market: First, research cities and neighborhoods to locate vibrant real estate markets. Real estate investing is all about location. Signs of a good market would be demand for rental property, growing population, thriving job scene, and low crime rates. For example, you could check out the BiggerPockets forum on the best markets for real estate investing. 
• Decide on your real estate investing strategy: The next step is determining the type of property you want. Are you looking for property appreciation, regular cash flow, or a mixture? For example, rental properties in hot markets can generate a significant amount of regular monthly rental income. However, other markets may be better for long-term appreciation. 
• Crunch the numbers: As with any real estate investing — local or long-distance — you must run the numbers to ensure a healthy return on investment. This involves more than just the purchase price. You must also calculate property taxes, maintenance, property manager fees, rental income, and other expenses. 
• Find Your “Core 4”: Your long-distancing investing team should consist of an investor-friendly agent, a lender, a property manager, and a contractor. Depending on the market where you’re looking to invest, you may have trouble finding your Core 4, especially in smaller markets.

Use BiggerPockets Rental Property Calculator

Before purchasing a rental property out of state, it is vital to ensure the property will cash flow. The monthly rent payments you collect from tenants should cover all your expenses and earn you a profit. One of the best ways to analyze unfamiliar real markets is to use the BiggerPockets Rental Calculator. 

Online tools will greatly assist you in determining the profitability of a potential rental property. You can then use the calculator to estimate cash flow and your return on investment over time. Crunching the numbers is essential because you may have to show lenders strong cash-on-cash returns. In other words — there must be enough money left after calculating all expenses to show a healthy profit.

How to Find Profitable Types of Out-of-State Property Investment Opportunities

What type of long-distance real estate investing strategies can help ensure strong cash-on-cash return? Let’s look at the characteristics of four types of real estate investments if you are considering purchasing a property in a distant location. 

Short-term rentals and vacation rentals

Many real estate investors focus on short-term rentals (STR) because they have higher rental rates and more tax breaks. Additionally, landlords can change rental rates based on demands like holidays, seasons, or weekends. 

What are the major considerations for investing in STRs? Location and demand are determining factors because travelers, tourists, or business people typically use short-term rentals. Therefore, look for destination locations, resort areas, commercial hubs, and tourist attractions.

Seasonal demand is a significant consideration when buying a property for short-term renting. Unfortunately, this means that you are not guaranteed 100 percent occupancy. Therefore, you must calculate rental rates to cover vacancies, expenses, and mortgage payments. 

It is good to remember that managing STRs long-distance can be challenging. This is because it’s difficult to verify tenants, meaning more potential maintenance issues. Therefore, a good property manager and good cleaning team is essential if you plan to purchase a property as a short-term rental. 

Long-term rentals

When investing in real estate, long-term rentals (LTR) can be a good option. So, what are the primary considerations of buying an investment property to rent out long term?

When managing a property from a distance, you must do your homework to identify the most profitable real estate markets. Next, it is necessary to have a robust strategy to manage the property. In many cases, this involves getting a trusted real estate agent and property manager. 

With an out-of-state long-term rental property, a solid screening process to find prospective tenants is crucially important. Getting the right tenant in your property minimizes stress, financial loss, and dealing with delinquent tenants remotely.

The best markets for instant cash flow from long-term rentals are those with booming populations, a healthy job market, and a vibrant rental market. 

Related: Finding success as a long-distance landlord.

Buying a house out of state to flip for profit

For investors in expensive markets, buying a rehab property to sell is an option to increase their portfolio. So what are the primary considerations when buying property to fix and flip? 

Here are three factors that could determine if house flipping out of state is a good idea for you:

• Property prices in your local housing market are overpriced.
• You are willing to spend the time to build a real estate team that includes a property manager and contractors.
• The rental property market in your local area is down.

If these three factors are in place, it may be worth considering house flipping as a long-distance real estate investing strategy. 

However, to sell a house out of state for a profit requires having a good real estate agent to see the deal through. Therefore, when crunching the numbers, you should consider their fees if you want to take a hands-off approach to real estate deals. 

Forced appreciation as a real estate investment strategy

Regardless of your strategy, you can consider whether forced appreciation is an option. This strategy can significantly increase the value of your real estate investment property and help build your wealth faster. 

What is forced appreciation in real estate investing? Forced appreciation is when you, the investor, control the increase in value of a property that you own. It should also include exploring ways to reduce operating expenses to drive profits.

Here are some ways how to increase profits through forced appreciation in a rental property:

• Make property improvements to justify increasing the rent price annually. 
• Promote your rental unit to attract more potential long-term tenants.
• Look at potential ways to increase living space. 
• Consider the possibilities of switching to short-term, Airbnb-type rentals. 

Here are some ways how to increase property value through forced appreciation:

• Explore ways of adding additional bedrooms or bathrooms to the property.
• Boost curb appeal to improve the property’s look. 
• Find out if it’s possible to convert an attic or basement.
• Consider buying a rehab property and live there while making needed repairs. This strategy gives you access to better possibilities of real estate finance and make a lower down payment on the investment property.

Is Investing in Real Estate Long Distance Worth It?

Long distance real estate investing is worth it if you buy the right property and have a robust strategy to manage it. However, it’s vital to remember that getting into real estate has a huge learning curve and buying an out-of-state house even more so. 

If you decide that investing in real estate “long distance” is for you, then ensure you choose a healthy market to find properties with the potential to make a profit. Then crunch the numbers and get the right team in place before you start.