Ideally, a rental property will cover all the expenses to purchase and maintain the property with a profit margin of 10% to 15%, according to LandlordStudio.com. That profit margin is called the net operating income (NOI). The percentage of net operating income derived from a rental property in proportion to the property’s value is considered the “capitalization rate,” or cap rate.
What is considered a good cap rate varies dramatically depending on the region, property values, and demand for rental properties. If you live in an area with low demand for rental properties or high home purchase prices, the barriers to entry to becoming a landlord might seem stifling.
One solution experts recommend is purchasing rental property in a different state with more variable landlord opportunities. Of course, this comes with its own set of challenges.
If you’ve decided to invest in real estate remotely, the entire U.S. is available as a possibility. But you want to choose carefully. It might make sense to choose a region that’s within driving distance so you can make an affordable day trip. You might even choose a city where you like to vacation or have family and friends that live there.
But first and foremost, you should keep that cap rate and profitability in mind. REINation.com recommended looking for a city showing high growth in both infrastructure and population, as that indicates a high demand for rental apartments.
Also, look for cities with a high affordability index. The affordability index measures a household’s ability to purchase a home based on the median income in the state.
Take Advantage of Today’s Technology to Assess the Property
Pre-produced virtual tours, as well as Facetime or Zoom calls, can help you experience all a property has to offer without the cost of a trip to the city. You can research everything from the quality of the schools to the demographics of an area through websites like Census.gov, BestPlaces.net, GreatSchools.org, and local Facebook groups.
Nothing beats a trip to a region before you launch your career as a real estate investor, but these tools can help you narrow down properties without traveling or even make the jump and invest in property you haven’t visited personally.
Understand Real Estate Laws in that State
Before you commit to buying property in a state, make sure you understand tenant and landlord rights there. You’ll want to know the eviction process, rent control laws, and how the state handles lease violations.
States like Texas, Arizona, and Pennsylvania tend to have laws that favor landlord rights, according to FortuneBuilder.com. For instance, a landlord can begin the eviction process in Pennsylvania after 10 days if a tenant violates the lease or fails to pay rent. Ideally, you won’t run into these hassles with your tenants, but it’s good to know the laws if you do.
Build a Network You Can Trust in That Region
Every good business needs a solid team behind it to maximize success, and your real estate investment endeavor is no different. Make connections with Realtors, home inspectors, and contractors local to the region where you want to invest.
Be Prepared to Hire Help
While you’ll undoubtedly need a team to support you while you purchase investment property in another state, it’s a good idea to hire a property manager or a property management company to assist on an ongoing basis after purchase.
A property manager can help with placing tenants, collecting rent, performing maintenance or hiring contractors to perform work as needed, and even handle emergency situations such as a clogged toilet or broken HVAC systems.
Investing in rental properties outside your home state can be a lucrative way to generate passive income, especially if you live in an area that’s not as profitable or favorable for landlords.
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