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Updated on Friday, March 4, 2016
From time-to-time, the idea of securing an out-of-state property may appear appealing to some. Whether it’s because you’ve been priced out of your own market or the thought of diversifying your portfolio by adding rental properties to it in another state sounds glamorous, securing a home in another area might have crossed your mind.
If you live in one state and you’re considering purchasing a home in another, there are a couple things you should know before signing on the dotted line. Here are some basic questions to ask before buying a house out of your state.
1. Is the rental market viable in the other state?
A cheaper house in another market isn’t always a sign that you should jump on a purchase — it could also be a sign that the market isn’t strong in that other area, which may mean renting out a home there could become a chore. A little research goes a long way when it comes to buying a home, so look into all the pertinent factors — like job growth in the area, the rental market, whether or not the city’s population is growing, etc. — and not just price before buying.
2. Do you know everything you can about this house?
It goes without saying that before buying a house you should see it in person, but it’s also important to do your due diligence into the history of the house before buying, as well. What are the property taxes like? Are there any liens or probate issues to know about? A title search through the local count clerk’s office can help.
3. Do you have the money for an independent, detailed home inspection?
When buying out of state, and especially when dealing with a seller’s agent who you probably don’t know at all, it’s also best to plan for your own, unaffiliated home inspection to take place while you’re on the premises as well.
4. Are you willing to deal with a property management company or make frequent visits yourself?
If the property you’re interested in is far enough away, it may make sense to hire a management company to deal with the goings-on with your rental property when you can’t make it there easily to check things out yourself. This will of course be an added expense on your part, and it will be worth considering whether or not you’re willing to put your property in the hands of others. If you’re interested in going down the path of using a property management company, interview some and find out what they charge first so you can determine whether their cut of your profits will make the purchase worth it in the first place. Some property management fees can cost between 4% and 12% of the gross rent, and going with cheaper options may mean a cheaper quality of service, so you’ll really need to do your research before picking which one to go with.
5. Are you prepared to pay more for an out-of-state mortgage?
One other pitfall on the way to your dreams of out-of-state home ownership may be the added costs that come with applying for a mortgage for an out-of-state home. Since non-owner occupied homes are considered riskier and tend to have higher loan default rates, conventional lenders charge higher interest rates on mortgages and require at least a 20% down payment on investment properties. You’ll likely also be looking at higher insurance premiums as a landlord, since standard insurance doesn’t always cover tenant’s claims.
While these may seem like a lot of negatives, for some, owning a home that they rent out and potentially live in during part of the year really is a dream come true. The point is that you’ll need to do your homework and be aware of the added costs upfront before jumping in so that you don’t get blindsided. You can also check out this piece for even more information on why out-of-state investment properties can be risky endeavors before making your decision.