Everyone enjoys getting a higher rate of return on their under market value property, which is why many investors look for out of state investment properties – meaning investing in lower cost markets than say, northern California.
But there is no question that there is some risk involved in investing outside of your home territory. This can get particularly dicey if you are investing in out of state investment property for appreciation. As a financially retired real estate investor in Texas, I never bought under market value properties for appreciation. Never! It is just too risky.
I always buy my below market value properties in San Antonio TX for regular, steady cash flow.
When buying out of state property, it is easy to be lured into a questionable market by low prices and promises of high rates of return. Here are some of the pitfalls you may run into when investing out of state:
- Your under market value wholesaler may tell you that the property can rent or owner finance for a higher monthly amount than the market supports. You should make sure that the rental and sold comps for the property support the proposed monthly payment. Note that you can eliminate most repairs on a property if you owner finance the house rather than rent it out.
- Under market value buyers in some out of state real estate markets are shocked to find out that they cannot sell the house as quickly as they like. Some developers in some states may restrict selling a property in the first year. I always buy under market value properties in C neighborhoods in San Antonio, so I do not have this issue.
- You buy an under market value property out of state and you discover that you are not allowed to lease it. Sometimes a homeowner’s association will pass a new restriction that limits leasing a property. Most of the neighborhoods I buy my below market value properties have no HOA.
- Extra costs for investing out of state. Other states and localities may have higher taxes and transfer fees. In Texas, we do have higher property taxes as we have no state income tax.
- Under market value houses in out of state markets may not appreciate as quickly as what you were promised. I never buy below market value properties for appreciation, so any appreciation is just icing on the cake for me.
- Property management companies may not manage your out of state investment property effectively. I always recommend that out of state investors owner finance properties when they buy them from me to eliminate property maintenance issues.
- Generally make certain that you do your due diligence when buying out of state investment property under market value. Do careful research on property values and price to rent ratios for the specific neighborhoods you are considering.