The Pros and Cons of Out-of-State Investments
Real estate investors typically prefer to buy and own properties that are close to home. That's not surprising since nearby markets are easier to research and local-area rental houses should be less expensive to manage.
Yet there are also good reasons to consider real estate investments that are further away or even across state lines.
Perhaps the most important argument in favor of out-of-state investment is that real estate markets are inherently cyclical. Markets that are blazing hot can suddenly turn icy cold; rapid price appreciation may slow dramatically or even become negative, and strong demand for rental housing can quickly disappear if a major employer shuts down. Investors who own properties in multiple markets can spread out both the risks and rewards of cyclical characteristics.
Investors may be tempted to try to "time" market cycles, but that strategy all too often depends as much on luck as logic. Since market risk is inescapable and timing poses its own risks, investors may achieve better results through a multiple-markets strategy that allows them to diversify geographically.
The opportunity to purchase properties in undervalued markets is another important reason to consider out-of-state investment. Buying properties as long-term investments in markets where prices are depressed, but rents are high and financing can be paid off more quickly can be a good strategy. Such markets may exist locally or be found only hundreds or thousands of miles away. Investors who limit themselves to local markets must forgo such opportunities elsewhere.
Investors who buy property far away from home must be ready and willing to give up much of their day-to-day control over the management, maintenance and upkeep of those properties. Typically, it's just not practical to find tenants, hire contractors or supervise work performed on a property that's a long distance away. For this reason, far-flung properties do tend to be more expensive to manage.
Investors who want to diversify through out-of-state investments should research distant markets and properties just as thoroughly as they would investigate local-market opportunities. Investors also need to consult competent and trustworthy real estate advisors in each market and familiarize themselves with at least the fundamentals of state and local property and landlord-tenant laws and regulations. Some states and localities are downright friendly to landlords; others tend to favor tenants' rights.
A trip to the local area is well worth the time and cost to learn more about the market's characteristics, meet prospective advisors and check out properties that may be available before you decide to invest. If all signals are positive, there's no overarching reason to rule out long-distance investments and plenty of reasons to go forward.
Copyright 2008, HomeVestors of America, Inc. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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