Investing Locally vs. Out of State
Turnkeys are often marketed to out of state investors looking for higher cash flows and lower home prices than where they live. And while it can be a great way to buy rental properties in different cities, you should be aware of the risks associated with buying out of state.
Investing Locally Is Usually Safer
Buying properties is a hands-on experience. From driving around the neighborhood to inspecting the house, it always requires somebody to be physically present in the area.
And it's usually best if that somebody if you, as nobody will put your best interests higher than you would yourself. Because of this, buying turnkey properties in your hometown or within driving distance is less risky. Consider the following:
- You probably know more about where you live than about any other city in the country. You know the town, you know the good and bad neighborhoods, you know where the job hubs and entertainment spots are, etc.
- You can physically drive through potential neighborhoods and get a first-hand look. No pictures will ever be as good as driving the neighborhood yourself.
- You can oversee the closing process in-person and visit the property during the inspection period. I can tell you from personal experience that walking through just a single home inspection will teach you more about houses than any reading you do online.
- You will be nearby if issues come up and will be able to take care of problems yourself without relying on somebody else.
When Out of State Investing Makes Sense
With that being said, there is nothing wrong with investing out of state. In fact, in many circumstances it will be more profitable, even taking into account the potential risks.
Here are some of the reasons why you may decide to invest outside of your hometown:
1. Lower Home Prices
Many cities around the country have prohibitively high home prices. New York, San Diego, San Francisco, Seattle and Denver are some examples that come to mind. Consider the following heat map of home prices around the US:
Higher prices will require larger amounts of upfront cash for down payments. This will naturally limit the number or properties you will be able to buy in that market.
2. Higher Returns & Cash Flow
When you compare the rent to value ratios of markets around the country, you will quickly see that many markets are “over-priced” in terms of property values relative to the rental income generated by those same properties. The result is often lower cash flow and a lower return on your investment.
When it comes to investing, diversification is a strategy used to minimize risk, while maintaining or improving your returns.
The same diversification principles that apply to stocks can be applied to real estate as well. If your entire real estate portfolio is concentrated in a single city, county or state, all of your rentals will be at risk if a local event negatively impacts the local market.
On the other hand, if you own properties in different cities and states, your portfolio will be less influenced by local events and market fluctuations.
4. Available Inventory
Another good reason for buying out of state is if you live in a rural or scarcely populated area, where there are few or no investment opportunities and the potential tenant pool is small. Generally speaking, if your city has a population of less than 500k, it may make sense to focus your efforts elsewhere.
The Bottom Line
When you start looking at available markets, keep in mind that investing locally or within driving distance from where you live has some important advantages. So while it's tempting to look at markets with the highest cash flow first, there may be great turnkey opportunities in your city or nearby.
At the same time, you shouldn't shy away from out of state investing, as the physical barriers can often be effectively eliminated with technology. Out of state markets can allow you to purchase more properties with better cash flow and returns, while diversifying your overall portfolio at the same time.