5 Big Challenges of Out of State Rentals & How To Overcome Them

KEY POINTS:

  • (1) Lack of market knowledge - The reality is that there is a wealth of information available online. There are tons of stats and historical information online that can provide information about cities and neighborhoods within them.

  • (2) Buying sight unseen - It is absolutely critical to get a property inspection when looking at out of state investment. This can save you huge money by revealing problems such as a bad foundation, mold, or other issues that you wouldn’t find otherwise.

  • (3) Finding good help - You’ll certainly need a good realtor and a solid property manager. You’ll also want to have a good general contractor to go to for renovations or a handyman for small repairs.

  • (4) Unknown landlord/tenant laws - A good property manager will be very familiar with local law and rules, making this yet another reason why selecting a strong team is imperative

  • (5) Difficulty managing remotely - I definitely do not recommend trying to manage out of state properties by yourself. Instead, find a trusted property manager to look after the properties for you. It will be well worth the investment.

If you are reading this, chances are that you have realized how lucrative the rental property market can be. Rentals can serve as a great source of passive income, but they certainly are not without risk. One strategy for decreasing your risk is to diversify your rental portfolio by investing in out of state properties. However, out of state investing is not without its own challenges. Let’s look at the 5 biggest challenges for out of state investing and how to address them.

(1) Lack of Market Knowledge

One of the biggest risks when investing out of state is not being familiar with the market. Unless you are investing in an area where you’ve lived before, chances are you won’t have any knowledge to begin with. This can be a bit difficult as you won’t know the best neighborhoods to target for investment. 


However, lack of market knowledge does not have to be a huge challenge. You can always do your due diligence. The reality is that there is a wealth of information available online. There are tons of stats and historical information online that can provide information about cities and neighborhoods within them. 


Additionally, Zillow can be your friend by providing important information such as price-to-rent ratio, which is perhaps one of the most significant factors that you should consider when narrowing your options. Researching areas is a labor intensive process but can certainly pay off by helping you make good decisions. Additionally, feel free to network with realtors or property managers to get some more qualitative insights. 

(2) Buying Sight Unseen

When investing in out of state properties, you may be tempted to buy sight unseen. Obviously, traveling across the country to personally view a property is not necessarily convenient in most cases. However, buying properties sight unseen comes with high levels of risk that can cost you major money quickly. 


So if you can’t see the property in person, what are your options? Ideally, you have a nearby relative or friend who can view the property for you or even better use the expertise of a trusted contractor. If not, you can always try a virtual tour with a realtor using Facetime/Zoom (this is what I utilize when I look at properties before putting in an offer). Additionally, continue doing due diligence. Use online crime maps (i.e. Trulia) to analyze the surrounding areas and get a sense of the neighborhood with Google Street View. 


Finally, it is absolutely critical to get a property inspection when looking at out of state investment. This can save you huge money by revealing problems such as a bad foundation, mold, or other issues that you wouldn’t find otherwise. While you may not be able to view the property in person, there are plenty of options at your disposal. 

Financial Pearl

"Zillow can be your friend by providing important information such as price-to-rent ratio, which is perhaps one of the most significant factors that you should consider when narrowing your options. Researching areas is a labor intensive process but can certainly pay off by helping you make good decisions. Additionally, feel free to network with realtors or property managers to get some more qualitative insights"

(3) Finding Good Help

Finding a trusted team to look after your properties is an important step in the process; however, this can be a bit difficult when investing far outside of your area. Who should be on your team? You’ll certainly need a good realtor and a solid property manager. You’ll also want to have a good general contractor to go to for renovations or a handyman for small repairs. 


How do you find these people from afar? The secret is to do thorough vetting. Begin with internet reviews to get a sense of how other people have felt about potential people. Additionally, you will want to conduct phone interviews with at least a few people for each position. Interviews are time consuming, but help you to get a sense of if the person is someone you’ll enjoy working with. Just like hiring for a team member at your optometry office; it takes time, diligence and effort to find the right person. 


After selecting your team, it is important to keep a short list of backups. After all, you may have an urgent issue that your contractor cannot handle in time or have a handyman that leaves a job halfway done. Planning for potential problems will save you time if you ever experience them. 

(4) Unknown Landlord-Tenant Laws

If you have rental properties where you live, you probably have a good understanding of the various laws governing the landlord-tenant relationship. These are often governed extensively by state and local laws and ordinances, which means you won’t know the rules that govern investing in other areas. 


Fortunately, the answer to this problem is relatively simple. First, a good property manager will be very familiar with local law and rules, making this yet another reason why selecting a strong team is imperative. However, there are also a number of other resources that you can take advantage of to evaluate laws in different areas. 


Looking up the laws themselves is extremely time intensive and many areas may not have their ordinances listed online. However, checking out investor groups, and asking for feedback on areas is a great way to hear from other people who have had experience in the areas. Let the World Wide Web help you crowdsource important information. 

(5) Difficulty Managing Remotely

Another one of the most common challenges seen with out of state investing lies in the sheer difficulty of managing properties remotely. Let’s be honest. If you want to self-manage your out of state property, it is going to require extensive time, effort, and money to do so, and will become an unwanted full time job. This is a frustration you really don’t want. 


While it might seem lucrative to try to manage remotely and you may successfully manage properties where you live without help, I definitely do not recommend trying to manage out of state properties by yourself. Instead, find a trusted property manager to look after the properties for you. It will be well worth the investment. 

Financial Pearl

"If you have rental properties where you live, you probably have a good understanding of the various laws governing the landlord-tenant relationship. These are often governed extensively by state and local laws and ordinances, which means you won’t know the rules that govern investing in other areas. Go hire a good property manager! "

Final Thoughts

Investing in out of state properties can help you diversify your rental portfolio, make investing more accessible if you live in an expensive area, and ideally help you develop equity if you pick an up-and-coming area. However, it certainly is not without its own challenges and risks. 


When investing in out of state real estate, it is extremely important to do your due diligence, conduct thorough research, and find a trustworthy team on the ground. Doing these things will help you to navigate challenges as they come along.


Want to learn how to build your own REI portfolio? Check out  Four Major Benefits of Investing in Out of State Rentals

Want to take a more passive approach? Check out  10 Reasons For Optometrists to Invest in Apartment Syndications 

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About Julie Phan

Dr. Phan is the co-owner (along with her husband, Toan Nguyen OD) of a highly successful optometry private practice in San Marino CA while also running a Sam’s Club sublease in nearby San Bernardino. Always the entrepreneur at heart, Dr. Phan also invests in rental properties. Through leveraging a talented team of realtors, contractors, and property managers spanning five states, Dr. Phan has steadily built a real estate business that generates consistent passive income. Along the way, she hopes to inspire friends, family, and colleagues about the value of real estate investment so they can work towards their own financial independence. Follow Julie's REI Journey on IG @ house_hustle at instagram.com/house_hustle/

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