Are you considering investing in property out-of-state? Buying a second home in another state can be a smart way to geographically diversify your assets and tap into markets that could be more financially advantageous than your home market.
But there’s a lot to consider when buying out-of-state. In this article, we’ll:
- Give you a 10-step checklist for buying a second home in another state,
- Cover some do’s and don’ts of successful out-of-state purchases, and
- Show you how to invest out-of-state without the upfront expense or management hassle.
10 Steps to Buying a Second Home in Another State
Step 1: Clarify Your Goals
Why do you want this new property? Are you looking for a vacation home? Are you buying a second home as an investment property? Or maybe you want the property to serve both purposes: being a vacation home for you while earning income as a vacation rental for others.
Your goal will drive your criteria for finding the right home, so set your goals early in the process.
Step 2: Choose a Solid Market
Buying a second home in another state exposes you to exciting new markets. In general, it’s a good idea to look for in-demand areas with strong growth trends. These markets allow for higher appreciation rates over time, bringing in higher rental rates for those planning to rent out the property. The Los Angeles housing market, for example, enjoys average appreciation rates near 10%, along with impressive rental rate growth.
Step 3: Arrange Financing
While conventional loans may be the most popular mortgage option, there are many ways to finance a real estate purchase. Even if you can afford to pay all cash for your second home, you may choose to leverage some debt to stretch your budget further.
It’s important to get pre-approved for financing even before you begin searching for the right property. Your pre-approval provides assurance that you can qualify for the loan. This makes your purchase offer stronger by showing the seller that you will be able to secure the funding needed to close the deal.
Step 4: Confirm Your Budget
Your pre-approval can inform your budget, but you don’t need to borrow as much as your lender offers. Take all expenses into consideration when deciding your budget, including:
- The down payment
- Closing costs
- Any renovation costs
- Property taxes
- Utilities
- Insurance premiums
- Regular maintenance
- An emergency fund for unexpected repairs
Step 5: Find a Local Real Estate Agent and Start the Search
Real estate is a hyper-local industry with market conditions varying by the block and changing by the month. So it’s always a good idea to hire a knowledgeable local real estate professional to help you search for properties in desirable neighborhoods and advise you on making an offer and negotiating a good deal.
Your ideal agent will have experience working with out-of-state buyers. They should offer services to make your remote search easier, such as private, real-time video tours of homes.
Step 6: Run All Numbers before Making an Offer
Before making an offer, you need to crunch the property-specific numbers to make sure they suit your budget. If you plan to use the property as an income-generating rental, you should also calculate vacancy losses based on local rates in, addition to the expenses listed in the Budgeting Section above.
Step 7: Create an LLC or Trust as Necessary
Rather than buying the new property under your own name, you may want to hold ownership in an LLC (limited liability company) or trust. The benefits of having a separate ownership entity include:
- Liability protection. Owning a property in an LLC limits liability to that LLC. So, if someone gets injured on the property, or a legal issue arises, the claims would go against the LLC. Your personal assets would generally not be at risk.
- Privacy. LLC/trust ownership can offer more anonymity since public records would list the entity as the property owner instead of listing your name.
- Flexible ownership structure. With an LLC/trust, you can add family members or business partners as co-owners more easily.
- Simplified transfer of ownership. Selling or gifting the property to someone else is often easier when the title is held by an entity because you can transfer interest without changing the title.
Step 8: Conduct Your Due Diligence
With a property under contract to be purchased, you can begin the due diligence process. This includes:
- A home inspection to determine the physical condition of the property.
- An appraisal to determine the fair market value of the property.
- A title search to check for other claims against the property.
- A survey to confirm geographic boundaries.
As an out-of-state buyer, you may wish to virtually attend the home inspection or send your agent in your place. Each of these due diligence tools should provide a comprehensive report digitally for your review.
Step 9: Establish a Property Management Plan
If you plan to rent out the property, you may want to hire a local property manager to handle the day-to-day operations, including unit showings, tenant screenings, lease signing, rent collection, maintenance requests, and renewals.
Property managers are typically paid a percentage of the gross rent, which will cut into your profit. However, when you don’t live near the property, a property manager provides a better experience for the residence while making your life easier.
Step 10: Finalize the Purchase
Assuming both you and the seller are ready to move forward, you’ll just need to sign the paperwork and wire the funds to finalize your purchase. In many cases, remote closing services are available to buyers who can’t physically attend the closing. Your agent or title company can record the deed with the county on your behalf. You may even ask your agent to have the property re-keyed and provide a copy of the new keys to your property manager.
Do’s and Don’ts for Buying a Second Home in Another State
Do’s of buying a second home in another state:
- DO assemble a boots-on-the-ground team. If you can’t be there in person every step of the way, enlist a team of professionals to be your eyes and ears. Your real estate agent, home inspector, appraiser, title rep, escrow officer, property manager, and general contractor are key to successfully buying a second home in another state.
- DO get familiar with local rules and regulations. Real estate law varies by state. Individual counties, cities, and HOAs (homeowners associations) may also have their own rules about the use of local property. If you’ll be renting out the unit, pay special attention to landlord-tenant law in your new market.
- DO account for travel costs as necessary. If you plan to regularly travel to and from your second home, you’ll need to budget for this expense. Transportation costs add up.
- DO plan for different maintenance needs. Location and climate dictate maintenance. A home in a colder climate, for example, may require winterizing, while coastal properties may need more frequent exterior resurfacing.
DON’TS of buying a second home in another state:
- DON’T assume you know everything. Even if you own multiple properties in your current market. The new market may have differences in regulations, construction, or any number of factors you haven’t considered. Keep an open mind as you learn about your new market.
- DON’T overlook home insurance differences. Insurance requirements and options can vary significantly by state. Review specific coverage needs, such as flood or earthquake insurance if applicable for your new market.
- DON’T underestimate time zone differences. Keep time zone differences in mind when communicating with your agent, lenders, or local service providers to avoid delays.
How to Buy a Second Home in Another State with Gatsby Investment
If you’re looking to buy property in another state purely for investment purposes, Gatsby Investment offers unique real estate deals with high return potential.
As a Southern California-based real estate investment company, we specialize in real estate syndication opportunities in the Los Angeles metro. Syndication pools funds from multiple investors for a specific real estate project, like a single-family house flip or a multi-family development. As an investor, you become a member in the ownership LLC for the property, giving you an equity ownership share in the underlying real estate. This entitles you to a share of the profits.
- Lower upfront costs. You can buy into a deal for much less than the cost of purchasing a property on your own. Single-family projects may have a minimum investment amount as low as $10K, while multi-family may be available for as little as $25K).
- No ongoing expenses. Investors pay a single upfront amount, with no further financial obligations.
- Less time and energy. Syndications are professionally managed by real estate sponsors (like Gatsby Investment), making it a passive investment for you.
- Leverages sponsor expertise. You benefit from our skills and network. You don’t need any specialized knowledge or experience.
- Easier diversification. Lower investment thresholds allow you to spread investment capital across multiple properties for quick portfolio diversification.
- Higher liquidity. Syndication projects typically have shorter investment periods than direct property ownership, making them a more liquid real estate investment.
Buying property in another state doesn’t need to be complicated. Let Gatsby take care of the details of your California real estate investments for you!