Investing In State vs. Out of State
Don’t End Up In a Sad State of Affairs
One of the first questions new real estate investors ask is whether they should buy properties in state or out of state. Many people are drawn to real estate because they enjoy having a tangible asset that they can view, visit, and renovate — all of which become more difficult when said asset is located halfway across the country.
Yet a savvy investor also knows to go where the money is. A stock trader wouldn’t invest in a stock if he knew he could get higher returns with a different one. Why would a real estate investor buy an in state property with the same outlook? The short answer: convenience and security.
Unlike stocks, which exist in some digital plane, real estate requires maintenance and upkeep. You can let your portfolio grow without paying much attention to it — you’ll never have to fix a plumbing leak on a mutual fund. When you own a home, you need to be a landlord, and being a landlord is more difficult when the property is thousands of miles away. Some people make it work while others prefer to invest in their own area. Here are a few pros and cons of each.
In state
The most obvious appeal to investing nearby is having peace of mind. If something goes terribly wrong with your property, you can be there to tend to it. You can get on good terms with your tenants, conduct inspections yourself, and generally take care of issues that would otherwise require a property manager. Some landlords, especially those with fewer properties, prefer to handle everything themselves rather than go the property manager route.
This means that investing in state can save you money, depending on how much work you’re willing to put in. Property managers will usually cost you 8–12% of the monthly rent (although Chalet is more affordable), which comes out to about $1,800 annually for a $1,500/month home. For some people, the comfort of having an expert around to deal with issues is absolutely worth the price. This is ultimately a decision that comes down to the individual.
Assuming you’ve lived in an area for long enough, you also probably have a good idea of which neighborhoods to invest in and which ones not to. This can be good, as you’ll have plenty of market insight without having to do much research. It can also backfire if you end up renting to your neighbors, which honestly never ends well.
Of course, investing in state has its flaws. Assuming you can’t pack your bags and move wherever you want, you’re going to be confined to a single area. If you live in a booming market like Sacramento, this isn’t too much of a problem; if you don’t, however, you may end up hitting a ceiling in terms of returns. A good investment in a booming market, even after the property management fee, can beat an average investment in a slow market that you manage yourself.
Out of state
The biggest, most obvious drawback to investing out of state is that you’ll probably never be able to see the home you’re investing in. This means a number of things. First, you’ll have to forego any sentimental attachment you have to your homes. For most investors, this isn’t a problem, but for some people, this takes away from the heart and soul of owning properties. You’ll also have to do extra research on the area, since you’re likely unfamiliar with the demographics, trends, and the best neighborhoods in a given city. Many investors take their knowledge of their own city for granted and dive in too soon when they enter a new market.
Since you’ll be so far from your homes geographically, you may have to hire a turnkey property manager, which can be risky if you don’t know what you’re doing. Many turnkey managers have a reputation for cutting corners and providing tenants with lackluster customer service. Paula Pant from BiggerPockets recommends finding a team and getting used to having a property manager before investing out of state. Yet this can be beneficial as well. Once you get the ball rolling, so to speak, it becomes easier to build your portfolio, since each individual property requires less work.
Out of state investors generally have much larger portfolios than local investors, since out of state homes are often cheaper than the areas they live in. Larger portfolios are somewhat of a necessity for them as well — on average, out of state investments get lower margins than those in state due to higher fees, maintenance markups, inability to negotiate rent with tenants, and plenty of other reasons. This doesn’t mean that out of state investments are worse. While you may get less cash per home, you’re also doing much less work and dealing with less stress, which allows you to buy more properties. Real estate is considered passive income, but when you’re dealing with maintenance issues yourself every week, it hardly feels like it. Yet this comes with a trade off: while you won’t have to manage individual properties, you’ll have to manage portfolios if you scale up enough. Individual properties require handiwork; large scale real investing requires paperwork.
Final word
Ultimately, where you invest is a matter of personal preference. Investing in state is an awesome choice for those who enjoy dealing with houses hands-on, interacting with tenants, and keeping their portfolios small. For those who care more about cash flow, don’t want to worry about maintenance, and want to diversify, out of state is the way to go. Every situation is different, so make sure to do your due diligence wherever you invest.
Which do you prefer? Do you own properties in state, out of state, or a combination of the two? Let us know in the comments! If you’re considering investing in Sacramento, make sure to give Chalet a call, and check us out on Facebook and Twitter.
