What Out-of-State Investors Should Consider When Adding a Property to Their Portfolio

What Out-of-State Investors Should Consider When Adding a Property to Their Portfolio - Article Banner

The rental market in Phoenix and throughout Arizona’s East Valley is attractive to investors who live elsewhere. If you’re an out-of-state investor who is thinking about adding a rental property to your portfolio, we want to help you prepare for that. From knowing the local real estate market to navigating the ever-shifting demands of local tenants, there’s a lot to think about.

Adding an out-of-state rental property to your investment portfolio can present some unexpected challenges and come with unique risks. But there are plenty of good reasons to do it. A non-local investment can actually strengthen your entire portfolio, allowing you to diversify and grow while providing a healthy return on investment (ROI).

Whether you’re investing from outside of Arizona or even outside of the country, your success will likely depend on the strength of your local relationships. Those relationships should start with a good property manager.

Here are some of the considerations that will require your planning and management.

Align Your Investment Goals

Before you add a property to your portfolio, you’ll need to make sure it fits with your investment goals.

Diversification is critical to growing the value of your portfolio and protecting it from potential risks. When you own property in different parts of the country, you won’t have to worry about a total loss if there’s a natural disaster or a sudden economic depression in one specific market. Every real estate market has its own local economy, its own strong industries, and its own pool of tenants. Things change, and they change quickly. If the market drops in one region, you’ll have investments in other areas which may not be suffering as much economically.

Diversifying your portfolio is a sound investment goal. Out-of-state investing will help you reach that goal.

Your investment goals will also point to the type of return that you want. Think about whether buying a property in Phoenix will deliver the results you want. If you’re looking for high monthly cash flow, you’ll need to explore what types of properties and which neighborhoods are likely to deliver that. If you prefer long term appreciation, you’ll be focused on different property types when you’re investing from out of state.

An out-of-state investment property makes excellent sense for investors who come from an extremely expensive market - like San Francisco. As an investor from a traditionally expensive region, your investment goals should absolutely include exploring markets like ours. You don’t even have to own rental property in your own city when the cost of entry is so prohibitive. In a market like Phoenix, Mesa, Gilbert, or the surrounding areas, you’ll get a lot more for your money. Your returns will be higher, too.

Prepare for the Challenges of Out-of-State Investing

There are plenty of excellent reasons to invest in a property that’s outside of your own state.

Prepare for the challenges and risks that are also inherent in this type of investment.

Here are a few of the things you’ll have to manage. It’s best to strategize before you invest, otherwise you’ll be left wondering how to figure out the details after you’ve already closed on the deal.

  • The Market Is New to You

    You’ll have to get to know the market that isn’t in your backyard. Even if you’re an experienced investor with rental properties in a variety of different regions, adding a new property in a new city is something that will require a bit of research, even if you’re working with a great local agent and property manager.

    Remote investing is completely possible. You don’t have to be physically present to identify a great opportunity and move towards an acquisition. But, you want to know what to expect from the market. You need to do some good research and connect with investors and experts who are already in the Phoenix market.

  • The Tenant Pool Is Unfamiliar

    Tenants in different markets have different demands. They might be different demographically and as well. You’ll need to know whether single-family homes or multifamily units are in high demand. Are tenants moving into homes with roommates or will it mostly be families that are renting your property?

  • Different Rental Laws

    You may already be familiar with the federal laws that govern rental housing, but the rules and requirements in each state are different. Then, there are municipal laws and city ordinances that you’ll need to follow, depending on exactly where you invest. The eviction process can be different from county to county. You’ll have to explore Arizona’s security deposit laws.

  • Budgeting for Expenses From Afar

    It’s not as easy to estimate renovation expenses, cleaning costs, pest control, and landscaping services in a market that isn’t your own. Without seeing the property in person, you may underestimate what will be required to get it ready for the market. Photos and videos will help and you’ll need to rely on the expertise and the networks of your local management partner. Make sure you’re budgeting for every possible consideration - whether it’s a simple cosmetic upgrade or a suite of new kitchen appliances. Don’t select vendors and contractors who you don’t know or who have not been referred.

  • Taxes

    Taxes must be paid, and that includes the income you earn on a rental property in another state. This may require a nonresident state income tax return. Make sure you’re aware of the requirements in the state where your new rental property is located. You may need to declare your income on a state income tax form as well. A good tax accountant can help you ensure you’re credited in your home state for any taxes that you pay out of state.

Considerations Before You Buy

There are always extra considerations when it comes to buying an investment property out of state. Understanding the local market includes getting an idea of how the following issues will impact your purchase:

  • The neighborhoods. Where are your best opportunities for an investment?

  • Economic trends. What are the main industries in this area and how qualified are your tenants likely to be?

  • Local laws and customs. You’ll need to know whether you are required to have a license, work with a specific agent, or follow any other locally important laws.

Think about your time and the level of involvement you plan to have with this new property. Before you add a new investment to your portfolio, make sure you have the time and the resources to make this a successful investment.

Make sure your money is ready, too. You don’t want to start looking for a new rental property if you don't have your financing in order. Have a lender lined up and a plan for how you’ll pay for this new addition to your portfolio.

Phoenix Property Management for Out of State Investors

Managing a rental property from afar is nearly impossible. While self-management is not impossible, there will certainly be some frustrating challenges and easy mistakes if you don’t have a local presence who can lease, manage, and maintain your investment.

Taking on the property management yourself can also present risks should there be a problem with the property or a conflict with your tenants. Protect your investment with good, local property management.

The right property management partner will help you have a successful investment experience. Here’s what to look for:

  • Experience with out-of-state investors. You need to know that your management company works with investors like you - from outside of the Phoenix area. If they’re successfully managing rental homes for other nonlocal investors, they’ll already have the systems and processes in place that you need for your own property.

  • Experience with the type of property you’re hoping to add to your portfolio. If you are looking for single-family homes in a new construction neighborhood, don’t hire a property manager with all of their professional experience in large apartment buildings.

  • Outstanding technology will be necessary to keep you in touch with your management team. You’ll also want to be informed of how your property is performing. Look for a tenant portal and a strong investment in innovative software and platforms.

  • Relevant local knowledge. Your property manager should be able to help you find ideal investment opportunities, forecast an approximate rental value, and give you some idea of how long it will take to rent your property out to a good tenant.

Finding the right property manager doesn’t have to be a challenge. Ask some local investors who they would recommend, and do a little online research. You want someone with a great reputation for outstanding customer service and reliable plans when it comes to leasing and maintaining your investment.

Our team at TCT Property Management has everything you need. We work with many investors who are outside of Arizona, and we know how to provide exceptional service and peace of mind. Talk to us about when you’re looking for when you’re ready to add an investment property to your portfolio. We can help.

Please contact us at TCT Property Management Services. We manage homes in the East and West Valley, including Mesa, Gilbert, Chandler, Scottsdale, and Phoenix.