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

Conclusion

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

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