What do I need to know about investing out of state?

Question

Hi, I live in San Diego, CA but am going to start buying rental property in Texas. Is there anything I need to know about this? Like do I need a business license to buy rental properties in Texas?

I am just an individual and not a company. I am working full time in San Diego and buying rentals now to supplement my retirement.

Judy C. · Answer

Joe, I am an investor and also a real estate broker in Abilene, Texas. The house prices here are very reasonable. Yes, the property taxes are higher, but you have to look at the entire deal before you rule out Texas investing! The sales prices are very reasonable, yet the rental market is very strong. Abilene is the home of 7 colleges including 3 private universities, a public university, Texas Tech Schools of Nursing, Pharmacy, & Public Health & a commercial college. We have Dyess Air Force Base and a strong medical community and many other things that contribute to a strong rental market. You have to consider the fact that Texas trails the other states in percent of homeownership so there is a higher percent of renters. When you compare the sales price vs rental rates to California and look at total income vs expenses, you will see that there are great opportunities here. You just have to watch the market closely and analyze deals until you find the ones that work well. My company offers full service management and maintenance. We also have excellent references from many satisfied investors. We manage & lease 650+ rental units in Abilene, Texas so we could give you a good estimate of rental appeal and rates prior to purchase. We normally email listings for preview and assist with analysis with estimated rental rates. We preview & video potential investment properties for our out of town investors, too.Again, I am speaking as a investor, not just a real estate professional.

Gregory N. · Answer

Jay, There are many other markets out there besides TX and AZ, and certainly markets where you can purchase 3 SFH in A or B class areas with 100k all in including closing costs. Don't get hung up on property taxes alone. They are only one of the expenses you will have. With respect to the distance, 5 hour drive vs 18 hours...does it matter? You're not going to be managing this property anyway correct? It's doable long distance, but how valuable is your time? I think most out of state investors would say that solid Property management is more important than property tax rate.Best of luck

Diane G. · Answer

Rule # 1 - Don't do it.Rule #2 - if you have at least 10 years horizon, buy CA... You will end up with better appreciation AND cash flow, 10 year later....Rule #3 - if you have to buy OOS, take a look at this one.... If you can get it for $350K ish, you will cash flow in a very passive way....http://www.loopnet.com/Listing/19857173/1609-West-Glendale-Ave-Phoenix-AZ/

Christine Kankowski · Answer

Hi Joe, I'm a local as well- Although I am in Temecula now. I have 2 in Texas (houston) but I am actually considering selling because the tax rates are so high. One house is almost 4 %. Yikes! Also, I've had them 10 years and the appreciation and rent increase has been minimal.I've been switching my out of state rentals back to the Temecula area where the growth and rental increase had been much better - plus i'm here.To buy out of state you need to get a great mgmt company, or be prepared to fly out there to handle the bigger issues. You also need to familiarize yourself with the areas, the school districts, the tax rates, the crime rates, etc (A lot of this can be done online, then go out to visit to see your already narrowed down areas. Buying the right house is the key.

Joe Koppel · Answer

Thanks everyone for your input. I think you saved me from making a big mistake! I have now been researching rental property in the Phoenix area where the property tax is much less. The homes are as cheap as in Fort Worth Texas where I was looking. The rents are not as high in Phoenix but it looks doable. Plus Phoenix is only a 5 hours drive for me as opposed to 18 hours to Texas.

Joe Koppel · Answer

OK you are raising a lot of questions for me. I know that I have to put down 20%as an investor. The reason I wanted to buy in Texas is because there are a lot of houses that go for around $125,000 so the down would be manageable. I estimate I will have about $100,000 cash of mine when my home here sells so I wanted to buy 2-3 rentals. If I buy in California just 1 down payment would suck up all my cash. It looks like the tax rate where I want to buy in Texas is 2.321% Is it higher for investors?

Christine Kankowski · Answer

Yes, Jay is right. I do mean property taxes. We pay a crazy amount. We keep saying when the tenant moves out, we will sell...but he's been there since we bought 8-9 years ago. Time to sell and move on. Hopefully the tenant will buy it :)

Jay Hinrichs · Answer

@Joe Koppel she means property tax... get a call with Bruce Norris if you can about Texas rentalsits OK for those that live there as the SKY HIGH property tax's are off set by NO state income tax.but for someone from CA.. your going to get it at both ends. and there are foundation issues that will crop up and not if but when the soils there are expansive.. so those two things.. have to be taken into consideration.what happens as well is if you buy an owner occ... they could have very low tax's as they get the owner occ exemption.. then when it goes to rental the tax's sky rocket.. and poof there goes your cash flow you thought were going to get.Just like folks that live in Texas why would they buy in CA and subject them selves to CA income tax and the 800 a year franchise tax... when they pay none in Texas it all evens out.. plus they don't have the expense of travel there etc.there are better tax treatment states for buy and hold out there... and if your appreciation is marginal then cash flow is the only reason to buy them

Joe Koppel · Answer

Thanks Christine, when you say a 4% tax what kind of a tax are you referring to? Not property tax right?

Diane G. · Answer

Rule # 1 - Don't do it....