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Investing in real estate not as simple as the “gurus” would have you believe, nor is it an unattainable myth that should be left to the pros. Due to tax laws, cash flow, and appreciation, investing in real estate has created more millionaires than any other asset class. However, there are risks and rewards to investing in real estate, and when the property is located more than driving distance away, new challenges can appear. These challenges can minimize competition and therefore, create opportunities for profit. Depending on where you are located, looking in out-of-state markets might be something to consider.
Here are five ways to determine if you should be looking out-of-state when considering your next real estate investment.
1) Rent to Price Ratio’s Don’t Make Sense
The most important facet to investing in real estate is the cash flow that the investment will produce. One of the initial ways to determine whether a market is worth your time is to look at the rent-to-price ratios in the area. If properties in your area are selling for $500,000 and renting for $3,500 a month, you need to start considering your options. Most cash flow investors only look in markets where there is a minimum of 1% rent-to-price ratio. For example: If the property value is $100,000 the property will rent for $1,000 a month. In states like California and New York, finding properties that can cash flow is all but impossible. In these areas, many investors invest for appreciation, which depends heavily on many uncontrollable factors and can cause damage to your portfolio. Remember, in the last crash, home values depreciated by 30%, while rents only suffered 3% losses.
2) Market Values are Too Volatile
I am sure that you have heard that the best time to be investing is when markets are volatile because it creates the greatest margin for profit. Do yourself a favor and wipe this thought from your head. Volatility is the enemy of financial planning. While rent-to-price ratios can tell a lot about a market’s ability to cash flow, the market’s history of volatility is also important when considering a real estate investment. For instance, Las Vegas rent-to-price ratios are well above the 1% discussed earlier. When you dig deeper into the data, you will see why volatility is also something important to consider. Since the 2008 crash, Las Vegas real estate has lost more than 60% of its value and prices continue to fall rapidly as the massive amounts of foreclosures work their way through the pipeline. Other cities where the rent to price ratios make sense but volatility has proven to be too wild are markets like Phoenix, Miami, and Tampa. All these cities have suffered more than 47% decrease in values since the 2009 peak. When you hear this type of value depreciation, it is important to remember that the high number of houses that are deeply underwater encourage people to stop paying their mortgage and allow their house to be foreclosed on. This creates a vicious cycle, bringing down prices even further.
3) High Insurance and Regular Weather-Related Repairs
The costs of doing business can make the difference between your investment being cash flow negative or positive. Before you invest in the market you live in, consider your options. States like Florida and Texas have notoriously high insurance rates due to the high probability of natural disasters. Not only this, but this violent weather can cause treacherous maintenance problems that can give you a six-figure headache. When you add up the time you will spend fixing roofs and repairing electrical appliances, the cost of investing in these markets add up. Even though prices have been appreciating in some of these areas, the potential for disaster can cause major portfolio damage.
4) Your Market’s Economy is Struggling
There is no need to be intentionally investing in areas that are going through hard economic times. Even if you have not been affected by your hometown’s economy, consider the data from an objective standpoint before investing. Areas that experienced extreme “bubble/burst” cycles during the last real estate crash are rarely good places to be investing. In many of these cities, the heart of the economy was based on construction, and now that there is no construction, there is no economy. Because of this, areas like Phoenix, Las Vegas, and Detroit are all suffering from sky-high unemployment. Be very wary of investing in areas where reported unemployment is 13-18%. When it comes down to it, someone is going to have to pay rent, and they can’t pay if they aren’t employed. When economies are hurting, it is even harder to keep vacancies low, and all but impossible to raise rents. Don’t be fooled by these “affordable markets.” They are only affordable if you can keep them rented.
5) You are Ready to Get Out of Your Comfort Zone and Start Making Money
When you are ready to put mainstream ideologies behind and start investing based on what makes sense, it might be time start looking out-of-state. It is shocking to me how many “experienced” real estate investors choose their markets based entirely on where they live and struggle to get a decent rate of return on their money. Life doesn’t have to be that hard! You may have heard one of the many mantras that investors use to justify why they only invest where they live; “Invest where you know” or, “Never invest more than 3 hours away from your home.” It has never been easier to research out-of-state investments than now so, you can “know” anywhere your heart desires. If you have the patience to build relationships with people outside of your state, it can be worth the wait. Think about the possibilities that you open if you overcome the fear of the out-of-state investment.