How to Buy Real Estate Investments in a New Market
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Real estate investing is a great business, but only if you buy and sell in markets that make sense for your strategy and goals.
The astronomical home prices witnessed during the covid pandemic are beginning to fall back to earth. However, inflation and rising interest rates still worry sellers, according to a new survey from Offerpad. Those concerns, paired with the slowdown in housing starts, mean that local inventory is waning in many real estate markets.
Meanwhile, strong new markets are emerging in regions like the Sunbelt, attracting buyers and renters with warmer climates, more affordable housing, and better quality of life. The biggest stars of these markets, like Austin, Nashville, and Raleigh/Durham, are called “Supernovas,” alluding to the explosion of sustained population and job growth.
As a result, staying local may hamper an investor’s ability to grow a portfolio and reap the rewards of another market’s booming economy. If you’re looking beyond your backyard for your next deal, be aware of the pros and cons of out-of-state investing and take the right steps to expand into a new market smoothly.
Traditionally, real estate investors begin by purchasing properties in a market they know, like their hometown. Familiarity with the area makes evaluating one element of the deal more predictable, reducing stress and risk.
However, if your strategy or investment goals require you to expand beyond what your market has available, investing in a new market may be the best way to grow your portfolio.
Five Benefits of Out-of-State Investing:
- Focus on a single strategy.
- Purchase better-performing assets.
- Diversify your portfolio.
- Find investor-friendly states.
Focus on a Successful Investing Strategy
Real estate is all about location. Location has a significant impact on the success of real estate investing for two reasons:
- Projected population growth
- Inventory
Whether you’re a long-term investor or a flipper, sustained and reliable population growth is a good indicator of higher returns on investment. The migration of buyers and renters strongly predicts an asset’s future appreciation and homebuyer or rental demand.
However, as market conditions and migration patterns of buyers and renters shift, hot markets become oversaturated and eventually overvalued. Instead of continuing to invest in a market with plateauing or contracting population growth, it often makes sense for investors to turn to secondary markets.
Assets that match a winning strategy may be more challenging to purchase as one market grows in popularity. Short of building your next real estate investment, the best option may be expanding your search area.
Rather than changing a great strategy to fit a familiar market, investing in new markets provides an opportunity to purchase a property that suits your strategy. #realestateinvesting #outofstateinvesting
Investors with a deep understanding of their buyers or renters can target similar demographics in another market by focusing on the right kind of property. Despite the low homebuilder sentiment facing the current housing market and the downturn in housing starts compared to previous months, 961,000 single-family homes were built in October. Long-term rentals focused on single-family residences are often ideal for markets with sustained suburban development.
Rather than changing a great strategy to fit a familiar market, investing in new markets provides an opportunity to purchase a property that suits your strategy. Buy-and-hold investors focusing on long-term rentals can take advantage of owning a rental in another area with a strong job market and projected population growth. Fix-and-flip investors typically maintain higher profit margins in markets with manageable price appreciation and strong homebuyer demand. Short-term investors can target towns with a growing appeal to vacationers and remote workers.
Related Reading: Long-Term vs. Short-Term Rentals: Which Is a Better Investment Strategy?
Purchase Better-Performing Assets
Location dramatically influences how well a real estate asset performs. Depending on who you ask, you may get different opinions on whether it’s better to focus on cash flow or appreciation as a real estate investor. Prioritization is usually based on the exit strategy or whether an investor intends to hold an asset for a few months, a few years, or well into retirement. Regardless of which you prefer, investing in a new market can increase both.
- Cash flow. Purchasing properties that match your investing strategy in areas with lower list prices means you can stretch your downpayment and lower monthly expenses. Investors can acquire one asset with a lower debt service or more assets without increasing their downpayment.
- Appreciation. The overall return on investment is increased if investors have an eye for finding markets with undervalued properties, growing populations, and healthy job markets. One key metric to follow is the median home price-to-income ratio. A lower percentage means more room for long-term appreciation growth.
If an investor has a number for monthly cash flow in mind or a preference for higher projected appreciation, identifying properties that can meet the targeted financial goal becomes easier when other states are an option.
Diversify Your Portfolio
Natural disasters, economic downturns, and population migration can all impact a real estate investment’s long-term value or short-term cash flow. Investing in various regions can strengthen a portfolio’s resilience should one market deteriorate. Diversification is a common principle exercised among other types of investments, and it’s also vital to a real estate portfolio’s health.
For example, coastal rentals can amass great returns as both long-term and short-term rentals. Still, exposure to hurricanes and floods can dampen demand and increase capital expenditures with higher insurance rates and unplanned repairs. By investing in single-family homes in nearby inland suburban neighborhoods or a townhouse in another popular beach town, an investor may reduce the impact of unpredictable natural disasters. The same holds for other hits to a local housing market, like a large employer moving its headquarters.
Diversification is a common principle exercised among other types of investments, and it’s also vital to a real estate portfolio’s health. #realestateinvesting #outofstateinvesting
Instead of agonizing over finding the right asset in a limited location, expanding to other markets can help maximize returns and minimize risks.
Find Investor-Friendly States
Certain states, counties, and cities are more restrictive in how an owner can use a property. Operating costs can be lower in markets with fewer regulations, lower property taxes, and less stringent landlord laws.
In Portland, Oregon, for example, landlords only have the option to pass on renewing a tenant’s lease agreement with a “qualifying landlord reason.” Acceptable reasons include demolishing or renovating the unit, moving the landlord’s family or another relative into the unit, or accepting an offer from a buyer who intends to occupy the property. If landlords don’t follow the strict rules, they are required to provide relocation assistance.
In recent years, unruly short-term rental guests have garnered the ire of neighbors. With the ever-growing housing affordability problem among service workers in popular vacation destinations, more towns are regulating the short-term rental industry with higher taxes, new zoning laws, or blanket bans.
For certain investors, it doesn’t matter how good a property’s capitalization rate is if it’s located within a city with strict landlord regulations.
Steps to Take When Investing Out-of-State
While there are many benefits to investing in an out-of-state market, every investor should perform the proper due diligence to understand if it’s the right move. Here are a few tips to help you transition smoothly into a new market.
- Evaluate unique market dynamics
- Research business requirements for out-of-state investors
- Explore local funding options
- Understand customary contract expectations and closing requirements
- Have a plan to manage the property
1. Evaluate Unique Market Dynamics
Different strategies may warrant a deeper dive into specific market metrics. Here are a few metrics to consider looking at before expanding into a new market:
Long-Term Rental Market Metrics:
- Population growth
- Job growth and industry diversity
- Job diversity
- Average income
- Number of houses on the market
- Rent to income ratio
- State and local regulations
- Average monthly rent prices
- School rating
- Community amenities
Short-Term Rental Market Metrics:
- Average daily rate
- Occupancy rate
- Available listings
- Seasonality
Fix-and-Flip Market Metrics:
- Population growth
- Job growth and industry diversity
- Median home price growth
- Number of houses on the market
- Cost of local labor
- State and local regulations
- Average gross profit after sale
- Average gross returns on investment
In addition to the typical metric evaluations, investors should dive deeper into what is driving market changes. Often, the best way to augment the numbers is by getting feedback from other investors, local real estate agents, and other experts in the area. Networking with other investors and surveying property owners in the area can provide a contextual “real world” understanding of why certain buyer and renter patterns unfold.
For fix-and-flippers, finishing a project on time and within budget requires assembling the right team. At first, it may make sense to work with a team you trust, but if they are unfamiliar with local permitting requirements or lack the professional connections to move a project forward, fines and delays may accrue. An out-of-state team may also misquote the cost of labor. Vetting local contractors before the project will likely reduce these headaches that cut into profits.
One of the most significant risks of investing in distant locations is a lack of control. Unscrupulous professionals may take advantage of the lack of accountability, so building connections and getting referrals for professionals who have worked with other investors with similar expectations and goals is imperative.
2. Research Business and Tax Requirements
Real estate investors use limited liability companies (LLCs) for various business reasons, including protecting other business and personal assets, tax advantages, access to different financing options, and more.
If an LLC is formed in one state, and an investor purchases property in another state, it’s typically considered a foreign LLC. Whether an LLC is foreign or domestic can affect how the LLC pays taxes and the rules and regulations under which an LLC operates. Depending on each state’s laws, there’s a potential for double taxation, meaning an investor must pay taxes to the LLC’s home state and the property’s state.
Research the rules of each state before purchasing a property. Be ready to wade through state tax complications if you buy property under a foreign LLC. It’s best to reach out to an attorney or tax specialist that can help answer specific questions about the pros and cons of forming an LLC in your home state or the state where the property is located.
3. Explore Local Funding
In addition to creating a domestic LLC for tax reasons, investors may consider opening an account with a local bank or credit union. Lenders may have additional requirements for out-of-state investors or hesitate to finance specific projects without knowing the market. Exploring financing alternatives in your buying area is a great way to ensure the deal closes with the proper financial backing.
After closing on the property, a local account may be more convenient for managing the asset’s revenue and expenses.
4. Understand Customary Contract Expectations & Closing Requirements
A smooth real estate transaction starts and ends with a well-executed and understood contract. The contract is the foundation for each party’s expectation of the other parties involved.
However, standard contract expectations may vary from one state to another and even from one area to another within a state. Who pays for what closing costs, earnest money penalties, inspection periods, and other elements may vary. Working with a local real estate professional specializing in investor transactions can help navigate how to best approach making an offer and executing contracts.
State legal requirements can significantly alter how you close a property and who manages the closing.
Remote online notarization and other types of digital closings are only available in specific states, and certain types of transactions may still require an in-person closing per state statutes.
Certain states allow a title agent to manage every aspect of the title, escrow, and closing process. In contrast, others require an attorney to oversee or perform specific tasks like the loan signing or disbursement of funds. States like North Carolina, Connecticut, and Georgia require a licensed attorney in that state to manage one or more aspects of the real estate transaction.
The terms of the contract may bind third-party professionals like title agents and agent attorneys to take certain actions. They represent the transaction, not a particular party, unless, for example, it’s an attorney hired by the buyer or seller as counsel.
Title agencies and attorneys are well versed in the standard purchase and refinance contracts involving a future or current homebuyer, but non-traditional contracts used by investors, like assignments and novations, can present hurdles. If the title company is unfamiliar with these legal instruments or inexperienced in double closings, transactional funding, or other investor methods of closing deals, they may be unwilling or unable to accommodate an investor.
To complete the transaction without delays or unnecessary hoops, investors should look for title agents and agent attorneys with state-specific expertise and a nuanced understanding of non-traditional transactions. The title agency coordinating the transaction is as important as the other local experts assembled by investors to enter a new market confidently.
Blueprint specializes in non-traditional transactions. Learn more about how we help investors grow their footprint.
5. Have a Plan to Manage the Property
Marketing and managing a rental property within driving distance can be a full-time job. With out-of-state investing, finding a reliable property manager is the final component of success. A good property manager eliminates the hassles of finding tenants, collecting rent, managing upkeep, and resolving tenant concerns.
Even with a dream team of professionals in place, it’s worth checking in on the property from time to time or setting recurring scheduled video calls with the manager to walk the property.
In addition to managing the rent roll, a trusted property manager can also help point you in the direction of a local accountant should any specific questions or concerns arise regarding how to report out-of-state rental income on tax returns.
Blueprint Makes It Easy for Out-of-State Investors
If out-of-state investing in single-family or small multi-family properties with four units or less is a part of your real estate business goals, Blueprint can help. Our team has state-specific expertise and specialized knowledge in non-traditional transactions like contract assignments, novations, double closings, limited and general partner funding, and more. We operate in most major markets across the country, so investors can rely on a consistent title and closing experience to grow their footprint.
Take control of each transaction by logging into your personalized Blueprint dashboard. Submit your transaction in a few clicks as soon as the contract is signed, track each transaction stage with in-app or email notifications, and choose a closing option like eSignature or remote online notarization when available in your area.
Whether you’re ready to explore new territories or want to grow more efficiently in your backyard, Blueprint’s team and technology can help you streamline your investing strategies. Book a demo to learn more.