Buying Investment Property Interstate
It is common for the average investor to want to buy an investment property not too far from where they live. There are many reasons for this, one being convenience and another being a sense of security of being able to drive past their investment now and then.
That’s not a bad thing and I’ve certainly done this myself.
But just because you may have more knowledge of your local market, does not mean it’s a good place to invest. Just because you want to (or need to) live in that area that does not mean other people want to as well.
If you live in a Country that is divided into states, provinces, counties (or whatever your equivalent government localities are called) then you can reasonably assume that buying investment property in one of these other states is not going to be much more complex than investing in your local area.
Except for the distance between you and your precious property!
Why Go Interstate?
You should not invest in another state, just because you’ve heard it’s a good idea. Put your investing cap on and remember why you are investing in property. If you go back to basics, you simply want to find properties that can be easily rented for a decent return and preferably with indicators for future capital gains.
When most people think of the property market, they think of one “mode” that the property cycle is in and assume that their whole country is in that mode. For example, when property is booming they think that all property in all states is going up when in reality, property is booming in some areas only.
Instead of assuming that one big property market exists, instead see the reality that all areas have their own independent micro-markets. Of course there may be national factors that affect property growth in all areas (such as interest rate movements) but ultimately every state and even smaller regions and towns can have different economic drivers that are moving their local property market one way or another.
I’ve discussed these drivers before, things like: Population Growth, Infrastructure Development and Job Opportunities.
When you contemplate that dozens, if not hundreds, of smaller property markets exist all over your country then you can see that whilst your local area may be flat or declining, there are certain to be opportunities in other areas of your homeland.
If you’re Australian (like me), another reason for investing inter-state is land tax. I won’t go into this now, but once the land-component value of your properties in a particular state exceeds a certain threshold, you are required to pay (yet another) tax just to hold onto these properties. It is even possible to exceed this threshold with just one expensive property.
Spreading Your Risk
So, not only can you take advantage of emerging property markets elsewhere in your country by looking at different regions and states, but by spreading out your property investments geographically you are minimising risk. This could also be described as one way of diversifying your portfolio (another way might be to change the type of property you invest in).
Some Things to Consider
Of course, if you do end up investing a long distance from where you live, you cannot expect to be able to manage that property effectively by yourself. You would definitely want to use a property manager in this situation as they will have the local knowledge to secure tenants and also have direct access to perform inspections and organise maintenance.
Since states generally also have their own laws and economies, you will want to do some research into differences such as:
- Legal Differences
- Tax Implications
- Local Council Rates and Fees
- Water/Power/Phone Rates
- Time Zone Differences (for communicating with your property manager)
Although you should consider these things, they shouldn’t vary too much from state to state but are worthwhile things to know about.
If you find yourself with a few properties at arms-reach and the local market is not doing much, you should definitely consider investing interstate for your next property. But remember, only do it because you’ve found an area with better short/medium term prospects and because the numbers stack up.
In the end, it still comes back to getting the fundamentals right to have a successful real estate investment.
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Property management expenses would need to be considered in determining your ROI on out of area properties.
kevin @ idaho real estate recently posted..The Idaho Shakespeare Festival!
You make some good points here about venturing beyond your local borders. While I am more a stock investor, much of what you say can apply to any asset class. Using diversification, which you mention, is a classically used stock based strategy – I actually agree with its usage more in real estate, as you suggest. Also, just the idea of looking elsewhere opens up a wider opportunity to find something undervalued – another good point you make that can be said about many markets.
Well done, and some worthwhile advice.
James
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Yes, I agree with the point that Security and convenience are the two main aspects which are the main focus of the investor while investing in a property. The main priority of every investor is accessibility which means that the property should not be situated too far from the city, where the investor can’t have an eye on it. If, the property is away from the city in an area with a low population tendency then, there will be some security issues.