Want To Invest in a Rental Property in a Cheaper State? 5 Things To Know
Written by
Stacy Sare Cohen
Edited by
Rebekah Evans
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If you’re looking to diversify your real estate portfolio beyond your local market, investing in property in a cheaper state could be a savvy strategy to “maximize profits,” according to Bigger Pockets, an online real estate investing community. When paired with high cash flow potential, these investments can deliver solid monthly returns and long-term gains.
Lower home prices, reduced competition, favorable tax environments and, in some cases, no state income tax make remote markets attractive. However, there are also risks, rules and regulations to consider. Below are key factors you need to know.
Legal and Financial Responsibilities
Managing an out-of-state rental isn’t just about finding tenants and cashing rent checks — it also means staying on top of legal and financial rules that vary widely depending on the location. Regulations and processes for evictions, rental control and security deposits differ significantly by state.
For example, if a tenant hasn’t paid the rent, evictions in the landlord-friendly state of Texas take three to six weeks while the State of New York is notorious for dragging out the eviction process six to 12 months, said Zach Cohen, managing partner of Ridge Street Capital on RedFin.
Taxes
Municipalities typically tax rental income where the property is located and you may also have to file tax returns in that state and your own. Some places may also charge additional property taxes for rental properties.
Short-Term Rentals
Not all municipalities allow landlords to rent properties as Airbnb, VRBO and vacation rentals. If they do, the township may require you to apply for a business license and meet zoning requirements.
Registration and Licensing
The local government often requires landlords to register their properties with the township before renting them out. Landlords must comply with housing codes for plumbing and electrical systems and structural integrity. Getting a property up to code incomes with regular fees and building inspections.
Partner With a Trusted Local Property Manager
Managing a long-distance property comes with challenges, so it’s essential to maintain strong relationships on the ground to deal with day-to-day issues, said Dennis Shirshikov, real estate founder and investor of BlueBerrie Properties.
“Running a distant property can be a logistical nightmare without the right help; lacking a reputable property manager familiar with the local area can make tenant issues, inspections and maintenance much more difficult when the property is tied to a distant location,” Shirshikov explained.
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Sources
- Zach Cohen, Ridge Street Capital on RedFin.
- Dennis Shirshikov, BlueBerrie Properties.
