Out Of State Vs. Out Of Area Investing

Man holding image of a home in the palm of his hand

For real estate investors that need to look further afield, is out of state, or simply out of area investing the smartest move?

More and more real estate investors are hunting for out of state deals. Is this really a necessity, or is there value to be found in deals closer to home? What justifies the jump?

Why Not Invest Locally?

As U.S. housing markets warm up, some investors are finding it harder to find the deals they want in their own backyard. Competition can be fierce, and prices are rising. This doesn’t mean that you can’t make deals happen. In fact, if some investors were a little less picky, or realized they need to invest in more expensive units, they could still be doing deals all day long. Remember that just because a property seems expensive to you, doesn’t mean that is doesn’t look dirt cheap to someone else. By acting fast and leveraging creative structuring, most investors will still find many deals right on their own doorsteps. However, that doesn’t mean you shouldn’t diversify for other reasons.

Still, in effort to find lower priced properties, more value, yield, and growth opportunities many investors will find looking a little further will turn up great results. So if this has become your mission, do you really need to go out of state? What do investors need to watch when they shop real estate further from home?

Before You Consider Out of State Investing…

Are there other cities in your state ripe for investing in real estate? Are there major cities in your state where housing is still cheap? How about more suburban areas near you that are ripe for growth?

As U.S. real estate heats up, house prices and rents are going up fast too. In order for regular workers to find the space and style of housing they want, they have to move outward. Many are simply being priced out. You can’t squeeze a family of five into a micro-loft very well. Areas which have been more rural for the past few years are likely to heat up again. If they are within commuting distance of major employment centers, or internet service is good enough to support remote workers, these communities could blossom fast. They could offer great value and some of the biggest short term price gains. Investors may be able to afford to diversify into more units faster thanks to lower property prices.

The Dangers of getting too Country

There are dangers of investing in areas which are too rural – at least in terms of finding a match for the strategies and goals of many real estate investors. Raw farmland may make a great investment in the grand scheme of things, but it may not produce the fast cash and ongoing passive income that many new investors are seeking today.

There can be other challenges to rural real estate investing too. Even towns in rural areas suffer from a small pool of buyers and renters. Generally, the larger the pool of end buyers and renters, the faster price growth and better the short to mid-term returns. Jobs and incomes can be another major factor. However, this can sometimes be solved with better positioning. For example; an elite fly-in community in the middle of nowhere can leap price boundaries.

However, rural markets can also suffer from a lack of financing. If bankers haven’t heard of your town, they might not want to loan there. Fewer financing options and lower LTVs can seriously hamper the growth of real estate prices, and resale timelines.

The Challenges of All Out of Area Investing

All out of area investing can have challenges. Not only challenges for the first investor, but anyone they hope to sell to. There is simple awareness of the market to get over. Then there are the mechanics of inspecting, making the acquisition, and marketing for resale. Perhaps most significantly; property management. There are solutions to all of these challenges. Local third party property management is one of them, but many may choose turnkey real estate investing programs.

Going Out of State

Investing locally can have its advantages. Besides management, it can provide control over entire swathes of property, and values. However, saturation also has its risks. If all of your property is in one area, there are a variety of threats that can damage your whole portfolio simultaneously. Diversifying across multiple states, and from coast to coast can provide much needed protection, while optimizing performance. For the pessimists worrying about another downturn; note how long it took the rolling crash of the early 2000s to make its rounds. While it may have kicked in as early as 2005 for South Florida, states like Washington don’t show prices peaking till 2008.