Investing in local real estate can be complicated, but when you move the process out of state, all those challenges can become magnified. Because of this, Self-Directed IRA investors will not give out-of-state properties a serious look. They focus on the negatives and miss out on good deals.
Investing in a property that is located in another state adds diversity to your portfolio and could give you a bigger return on your investment (ROI) than properties in your state. Sure, there are unknowns you must deal with:
- You do not know the area.
- You might not know the laws.
- You cannot walk into a property and see it firsthand.
- You have not developed any contacts.
But these are not barriers since each of them can be overcome. Many of us do not have the cash to make a real estate investment, and few of us have enough cash flow to support two mortgages, but a lot of us have accumulated retirement funds that could be used to take advantage of a potentially lucrative investment.
You cannot invest in real estate with a conventional IRA, but you can if you have a Self-Directed IRA. Once you have opened a Self-Directed IRA account, you have opened yourself to a vast array of investment opportunities, including real estate.
If you want to get started in real estate and believe that greater value is available in another state, here are a few suggestions to consider:
Decide what you want
It makes sense to know what kind of property you want before you start searching. Make a list of your goals for the property and what you want to see in it. Only then can you look for something that meets your criteria. Otherwise, you could get distracted during the process and end up with something that does not fit.
Ask yourself what kind of property you want and who would be an ideal tenant for it. Decide how much you want to invest in the property and how much rent you will need to get a good ROI for your Self-Directed IRA.
Without starting with a clear vision of what you want, it is no use deciding on a location.
Research the area
After you have come up with specifics for a property, you can focus on the area. You should get to know everything about where you are looking. Things are different from one area to the other. Look at:
- Tax rates
- Property values
- Employment rate and type
- Crime rate
- Local laws and restrictions
All of these factors help you decide if this is a viable area in which to invest. Most of this information is readily available. Check out the prospective city’s website for their Annual Financial Report. Once you have a handle on the area, you can start looking at specific properties to invest in with your Self-Directed IRA.
Pay attention to the details
Once you find an investment property that sounds good, dig into the details. That will not be as easy since you are not there in person. Here is where technology can assist you with video tours of the property, Skype, and electronic documentation. You can see the neighborhood and the property itself on Google Maps. If you are not up to speed on technology, take the time to learn enough to help you make this investment from a distance.
Other recommendations include getting in touch with area property managers to get their opinion on the property you are considering, evaluating rent prices, and talking to local investors who are familiar with the neighborhood and the property. As soon as you have the property under contract, hire an appraiser and a reputable inspector.
Assemble a trustworthy property management team
It can be very unnerving to own an investment property in your Self-Directed IRA that is hundreds (or even thousands) of miles away. That is why it is crucial to hire a property management company that you can trust to run the day-to-day operations of your investment.
Try to get as many referrals as possible and interview several before making a decision. Make sure they are communicating promptly and clearly during the screening process. If not, that could be a red flag that they will be unresponsive after you hire them. You are looking for a company that will keep you informed, manage your tenants, and guards your investment.
The property management company is vital to the success of your out-of-state investment property. Take your time and choose it carefully.