Monday, 22 October 2012

Things to consider when investing outside your home state

To date my series of posts on investing in real estate have been centred on the assumption that when you buy your first investment property you will be buying close to home.  This is because you tend to know the areas better, know the demographics and have a sense for the rules and regulations. 

When investors start thinking about their next investment property, or one further down the track they often start thinking about investing outside their home state.  There are several reasons that you may want to consider doing this but be aware that it comes with significant draw backs and you cannot assume that because you have an effective, functioning relationship in your current property / properties that this will translate to another state.

Pros of investing outside your home state

There are several pros to investing outside your home state and most of these centre around the benefits that come from having a diversified portfolio.  I have outlined some of the benefits below:
  1. If your state is relatively expensive for property at the moment you can sometimes buy in 'slower' states which you think will recover
    • Property markets are not homogeneous and while some are growing very fast, others are slowing down or are often in slumps
    • If you are looking to buy a property you may not find value in your own state but there may be many great deals in other states
  2. It allows you to diversify state specific downturns / high rental vacancies
    • If you have multiple investment properties in one state the fact is that all of them will be affected by the same factors at the same time
    • Having properties across multiple states allows you to diversify some of this risk away, especially when the other states are driven by different sort of impacts than your own home state
Cons of investing outside your home state

There are some very clear downsides to investing outside your home state and you should think about these very carefully before investing.  Only if you are totally comfortable should you go ahead and take the plunge.  Some of the downsides and risks include:
  1. You have to start from scratch and do all your research again
    • Although the asset class is the same, fundamental things like rules, regulations, rights and obligations are often very different between states
    • Do not go into an investment in another state thinking the same rules apply!
  2.  You do not have the insights that you do in your own state
    • We all have significant insights into our own state that we don't have in other states
    • We know which areas are better and worse and which ones are desired or have the potential to be desired in the future
    • Although you can do your research in another state you just do not have that same level of inherent knowledge
  3. Searching is a time intensive process - there is a risk that you make a hasty choice because you have limited time when you travel
    • As you would know from your current investment properties, buying a property is never a quick process - although you can spend all the time you like on websites you actually spend much more examining the properties you are interested in
    • There is a risk that because you have to drive or fly interstate to view the properties that you make hasty decisions because you know you don't have the luxury of unlimited weekends searching
  4. You end up placing a lot more trust in your property manager from the start
    • Property managers are great and I think that once you have a good one you can trust them significantly
    • The problem with an interstate property though is that you have real way of 'checking up' on them - you can't drive by the property to give it a once over to make sure everything is going smoothly
  5. Everything ends up costing more
    • You will find that your expenses are higher from the start (such as travel and search costs) and they will continue to be higher (through things like long distance calls to your property manager, travel for inspections etc) right through the life of your investment property


There are many more things to consider - this is just a brief overview of some of the things which you need to think about when you invest interstate.  Sometimes the investment rationale will be so compelling that it actually ends up being a great deal but often it will not be.  You need to always go into an investment with your eyes fully open and knowing most of the pros and cons - do your research completely before investing in property outside your home state

You May Also Be Interested In:
Investing in Real Estate - All Topics
Investing in Real Estate - House Hunting
Understanding your rights and obligations as a landlord
Investing in Real Estate - Picking Your Property Manager


  1. Almost feels as though I am spamming this blog (I do have a life haha) however this is another interesting topic..
    There is a large emphasis placed on doing your research/due dilligence along with divesifying by purchasing properties in different states or suburbs..
    As someone who has never invested in property (am looking to soon), I'd be interested to know how much research you actually did? I know you've done a few posts on this, am finding it difficult to find the time and head space to do so (yet know it is paramount to do so)

    It feels as though there is quite a lot involved and a breadth of information from all sources out there.. My gut instinct is telling me buy out in the Western Suburbs of Sydney (due to affordability of the area) then either have a granny flat pre-existing on the property or build one from scratch, there are specifications around upon researching..
    However I'm conscious or concerned about choosing the "wrong" area.. How much of a consideration was this when you bought an investment property?

    I understand that it will depend on what my aims/risk profile etc are..
    Hope I'm not bombarding you with too much there..

    1. Hi Jef,

      Not at all - I think your questions are great

      I found the same thing when I started doing my research - there was real emphasis on buying outside of your state. The more I thought about doing this the more I realised that the benefits were overstated and the costs understated.

      In terms of how much research I did before buying my first property - I did A LOT of research on location, the property I bought, what I needed to do to in order to be a landlord etc. HOWEVER I did not do sufficient on research on whether the investment was a good idea and at what price the investment stacked up for ME. In hindsight I was looking at a terrible (boom) time though I'm still very happy with the long term prospects for the property

      Property investing is not something you can skimp on the research for. It takes a while to appreciate how much of your investment capital it is actually tying up. Read as much as you can (from as many different people) - always remember though that it is better to be cyncial than trusting when it comes to finance.

    2. In relation to location - I cant honestly tell you what the best location is (or even what a good location is) and I'm certainly not up to date on the Sydney market.

      One thing I would caution you about (because I have thought about it) - is when it comes to building a property (instead of buying an existing one) keep in mind the time that you will have no tenant paying the rent to help with the loan and also how much do YOU know about building / renovating (I know very little so it was a bad idea for me)

    3. The 'wrong' area is a very controversial notion because it really depends on what you are going for - some areas offer growth and no yield and others offer a lot of yield but limited growth.

      I think picking the next 'trendy' or growth suburb is always a challenge to do before it actually happens...

      For me I did not consider it too much - I picked an area I knew REALLY well and then tried to find the best deal that I could (knowing within that area what people liked and didnt like)

  2. Decent advice thanks for this, have thought about directly asking agents if they would be able to provide me with sale prices of properties for the previous 12 months (not sure I like my chances, however I'll ask the question, the worst they can say is no)

    It's difficult to know about capital growth potential of an area (it seems as though it is going to be more of an educated guess).. Lately there appears to be plenty of properties that are ticking the boxes for what I am looking for (finding a property with an approved DA though seems as though it will be a challenge)..

    When you mention not to skimp on the research was this in reference to the price that should be paid for a property?, how much growth it would be expected to experience (difficult to predict with that much accuracy) or what the market in the area is looking for?
    I would say it is probably a combination of all 3 and probably a few more questions, any suggestions on what would be vital info to know..

    One blog that would be great is having a break-down of costs associated with rental properties i.e. insurance, electricity, interest repayments, council rates etc (as I feel people underestimate how much running an investment property would cost)

    On a tangent in attending a few open homes I am finding agents are trying to find out how much I have to spend to which I am attempting to be vague and mention between two ball park figures, any advice for side-stepping this question without giving too much away?

    I know I've covered 3-4 aspects in this post, hope you can distinguish them :P

    1. Hey Jef,

      I'll try and get to all your points:

      When I said not to skimp on the research I meant all aspects of it - when you have been looking for a few months it is easy to stop worrying about things like looking at whether it is close to amenities. But yes it takes time to work out what you think you should pay for a house so that is something you should work through on a case by case basis too.

      Finding capital growth is the big thing that all investors look and hope for. I can honestly say that I don't know what the answer to that is. Everyone's silver bullet flaws and draw backs and the truth is if that it could be predicted then people would definetely keep that information to themselves.

      NEVER EVER tell the agents how much you have to spend. That is the one ace that you have up your sleeve. If you sound like you know what you are looking for they will assume that you have the funds. Once you tell them then you will never get a bargain (if you have more than they want) OR they will not bring you anything.

      Thanks for the suggestion re the blog post - that one is easy to do.