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Rental Investing: Investing Locally vs. Across State Lines

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Rental investing can be a highly profitable yet complicated endeavor. While the benefits far outweigh the obstacles, navigating the evolving regulatory challenges in the residential rental property market can be daunting early on. Once you start to get comfortable, it’s typically time to expand. As rental property investing portfolios grow, many investors choose to expand their business beyond state lines.

Is spreading out across state lines worth the additional headaches of learning and adapting to new state and local regulations? Is it better to stay local and grow your rental portfolio in the comfort of your backyard? The answers to these questions are complex and depend on your unique circumstances, resources, and goals.

Below, we’ll discuss the benefits, considerations, and challenges of rental investing locally vs. across state lines, as well as the tools and resources necessary to expand your real estate portfolio successfully:

The Pros of Staying Local

For many real estate rental investing beginners, a smart plan is a financially palpable plan. In short, you’re not risking more money than you can lose. Local rental investing offers investors several money-saving as well as logistical benefits, including:

Self-management: While hiring a property management company has its advantages, it can be costly. Investing in a local housing market can save money if you self-manage your rental properties.

DIY repairs & upkeep: As a local landlord, you can increase your rental income through sweat equity. Rather than relying on costly service providers for lawn care or home repairs, you can take on various DIY projects to cut costs and increase return potential for your real estate investments.

No need for outsourcing: Networking and building a dream team of real estate professionals should be a long-term goal for growth. However, early on, local investing allows you to work alone and not rely on other real estate professionals. With prospective investments geographically tangible, you mitigate the need for local real estate agents, contractors, and brokers.

Local knowledge and familiarity: When you invest locally, you start with a superior knowledge and understanding of local real estate markets, neighborhoods, rental demands, costs, and expenses. You are familiar with–or at least must only worry about–local tax laws and landlord regulations, making local rental investing much more straightforward.

Considerations

While local multi-unit or single-family rental investing has perks, it can be limiting. For starters, local rental investing can hinder your ability to build a diversified real estate portfolio. Additionally, when you stay local, you are confined to the markets within your region and neighborhoods. Based on your overall business goals, local rental investing can limit your ability to scale and find more lucrative opportunities in attractive and less costly out-of-state markets.

The Benefits of Out-of-State Rental Investing

If your goal is to scale and grow your real estate business to its fullest potential, eventually you will teeter over the lines of out-of-state investing. While there is a learning curve when it comes to understanding how to invest in real estate out of state, the benefits far outweigh the challenges, and include:

Higher ROI potential: Expanding out of state could result in better returns. By crossing state lines, you unlock opportunities to find rental properties for sale in emerging markets with potentially lower property costs, higher average rental costs and appreciation, or greater consumer demand, which make for an ideal long-term rental investment.

Portfolio growth & diversification: If you build a portfolio within a single local market, there is an inherent risk if that market experiences a downturn. By expanding beyond state lines, you diversify the assets within your portfolio, mitigating risks and protecting you and your business. Additionally, you unlock a treasure trove of new opportunities that better position you and your business for success.

Tenant diversification: You also get the opportunity to vet and find a diverse group of tenants. If your local rental investing market is prone to vacancies or delinquencies, out-of-state investing could be a great opportunity to expand into markets with lower vacancy and unemployment rates. This helps you find quality tenants and solidify a steady income stream.

Challenges of Out-of-State Rental Investing

While there are several business and financial benefits to out-of-state investing, there are certain challenges that come with moving out of state:

Market inexperience: You likely enter an unfamiliar rental market, which can be risky without adequate research and a smart business plan.

Rental distance: Local investors have the luxury of short travel times to view, inspect, and assess a local rental property. Out-of-state investors must rely on great decision-making and a keen eye, or look to build a team of trusted local professionals, to mitigate the lack of familiarity they may have with a property.

Local laws & regulations: Navigating the evolving regulatory challenges in the residential rental property market is difficult enough. Venturing into new territories and owning property in another state means new taxes, zoning rules, and regulations.

Property management: Living outside the state of your rental unit makes it nearly impossible to manage it effectively on your own. In most cases, you will need to invest in a local property manager.

Keys to Rental Investing Success

Rental investing success begins with identifying and planning for your overall business goals. Is your goal to create one or two additional income streams on the side? If so, local rental investing could be the right market strategy for you. However, if you want to build a rental investment business with multiple income streams and a diversified portfolio, out-of-state investing provides the opportunities and market diversity to succeed.

If you choose to invest in out-of-state rental property:
  • Do adequate market research to identify markets with:
    • A bustling job market
    • Residential growth
    • Housing affordability
    • Low unemployment rates
  • Ensure you are knowledgeable about local and state:
    • Landlord and tenant laws
    • Property taxes
    • Insurance costs
    • Other miscellaneous expenses
  • Build a local network of real estate professionals with an in-depth knowledge of market trends, investment opportunities, home inspections, and renovations. Network with local:
    • Real estate agents
    • Contractors
    • Home Inspectors
    • Property managers
  • Find a reliable financing partner with the reach and flexibility to fund a diverse, multi-state property portfolio adequately.

Financing Your Rental Investments with Finance of America Commercial

Whether you’re looking to invest in local real estate markets or expand beyond state lines, adequately financing a rental property is pivotal to the success of any business plan. Finance of America Commercial (FACo) provides the most reliable and flexible long-term rental financing on the market. With several term, rate, and prepayment loan options available, our experts have the freedom to mix, match, and tailor the ideal financing for your unique needs.

Finance of America Commercial’s Rental Portfolio and Single Rental loan options offer:

  • Competitive 30-year term loan options
  • DSCR with no W2s, paystubs, or tax returns required
  • SFR, warrantable cons, townhomes, PUD, and 2-4 units eligibility

With financing available in 44 states, FACo has the reach and lending flexibility to guide you to success in rental investing.

Ready to unlock the fullest potential of your rental property investing business? CLICK HERE to schedule a FREE consultation with a FACo expert today!

This content is for informational purposes only and should not be construed as investment or legal advice. Neither the author of this content nor Roc360 assumes any liability for actions taken or not taken based on information contained herein. Investments involve risk, including potential loss of principal. You should consult a qualified professional before making financial decisions.

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