Investing in Out-of-State Commercial Real Estate

Mark Meskauskas
12 December 2023
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Investing in commercial real estate in another state is an effective method to diversify your portfolio, but it comes with challenges. Nevertheless, these challenges can be effectively managed with the appropriate real estate investment strategies and guidance, leading to a profitable investment.

In this blog, our team of experts at Brian Properties will discuss how to invest in commercial real estate out of state and explore the benefits and challenges.

If you're interested in venturing outside Illinois with your commercial real estate investments, then continue reading.

Understanding the Commercial Real Estate Market

Understanding the current market trends is essential to investing in commercial real estate, enabling one to assess potential growth and profitability.

Analyzing these trends can give you a solid understanding of potential growth and profitability.

Market Trends Analysis

Diving into out-of-state markets may seem daunting, but it becomes much more attainable once you know what to look for.

Start by checking out CBRE’s latest research reports. These reports provide valuable insights into recent developments in different regions across the country.

The analysis should also include studying demographic shifts and economic factors such as employment rates or new business formation. Understanding economic indicators helps predict if your investment will yield desirable returns in the long run.

Evaluating Forecasts

Beyond current conditions, successful real estate investors must also anticipate future trends. Investors should consider where things might head next year or even five years.

Use online resources and research to find future projections for commercial real estate.

Location Analysis: Spotting Promising Locations Out-Of-State

Identifying promising locations out of state starts with thorough research into population growth, job market, infrastructure development, and real estate prices. Look for areas with a robust economy, a steady influx of new residents, and a burgeoning real estate market with potential growth.

For this, you can leverage tools like City-Data, which provides detailed profiles for cities across the U.S., or consult with professionals at a commercial real estate firm such as our team at Brian Properties.

We have the expertise to help guide investors towards locations that align best with their goals and risk tolerance.

People meeting at a networking eventIs Investing Out of State a Good Idea?

Investing in out-of-state commercial real estate can offer many benefits and is a solid strategy to diversify your investment portfolio.

Diversification

One of the key advantages is diversification. Investing in multiple geographical locations can protect against the volatility of local markets.

If one state's economy takes a downturn, your investment in another could offset these losses.

Potential for Higher Returns

Out-of-state investments often present opportunities for higher returns.

Some markets out of state, especially those in the path of growth, can offer higher capital gains and rental yields than your local market.

Access to More Opportunities

Finally, looking beyond your local area widens your scope of potential investment opportunities. This allows you to take advantage of differing market conditions and capitalize on emerging trends, providing more options to find properties that align with your investment goals.

Challenges of Investing in Out-of-State Real Estate

Investing in out-of-state real estate, while potentially profitable, presents unique challenges that every investor should be prepared for.

Lacking Local Market Knowledge

Unlike investing locally, investing out of state implies not having an intimate understanding of the market.

While online resources and reports provide helpful insights, they may not provide a comprehensive picture of the local real estate climate.

Property Management

Managing a property from afar can be more complicated than handling a local one. This includes dealing with regular maintenance, tenant issues, and emergencies.

However, with the help of a property manager like Brian Properties, investors can outsource these tasks and ensure their properties are well-maintained and tenants are happy.

Travel Expenses

Investing in out-of-state commercial real estate may incur additional travel expenses, such as visiting properties for inspections or meeting with local professionals.

These costs should be factored into the overall investment budget to avoid unexpected financial strain.

Regulatory Hurdles

Each state has its own set of laws and regulations regarding real estate investment. This could range from differences in landlord-tenant laws to variances in property taxes.

Navigating these legal intricacies can be more challenging when investing out of state.

Increased Risk

Out-of-state real estate investments can also carry a higher risk. You can face financial losses if the local economy suffers or a natural disaster occurs. This makes it essential to conduct a comprehensive risk assessment before investing.

Legal and Tax Implications

When you decide to dive into commercial real estate investment, the laws of your chosen state become an essential part of your journey.

This is where understanding legal frameworks for out-of-state investments comes in handy.

State Laws and Regulations

Different states have different rules regarding property acquisition, management, and disposal. To navigate these waters smoothly, it's crucial to familiarize yourself with local regulations before investing.

You might need help from a seasoned attorney who specializes in commercial real estate law. They can guide you through processes like zoning restrictions or environmental regulations that could impact your investment plans.

In addition to laws specific to the type of property (retail, industrial), consider tenant-related legislation. Some states are known for their pro-landlord stance, while others lean more towards protecting tenants' rights—this can influence how easily you manage properties and resolve disputes if they arise.

Tax Considerations

Apart from complying with local laws, taxation is another factor affecting commercial real estate investing profitability. Different tax obligations across various states significantly impact return on investment (ROI).

If not handled properly, taxes can eat into profits, so don't overlook them. For instance, some areas offer tax incentives to attract investors, which might tip the scales when deciding between similar opportunities elsewhere.

The Benefits of Networking

The real estate industry thrives on connections. Networking is a must-have skill to succeed in commercial real estate investing, especially when considering out-of-state properties.

Building relationships with brokers, agents, and property managers can give you an edge.

How to Network with Out-Of-State Brokers, Agents, and Property Managers

A strong network gives access to exclusive deals that might not be publicly listed. However, how do you build these crucial relationships?

Start by attending local real estate investment meetings. These gatherings are great places to meet other investors and professionals in the field.

Connect with professionals from everywhere using digital tools such as LinkedIn. Join groups related to commercial real estate for the best results.

Leveraging Local Expertise for Informed Decision-Making

Location is a crucial factor to consider. This becomes even more significant in out-of-state investments, as understanding the market becomes challenging when you're distant from the area.

This is where leveraging local expertise comes into play. Engage locally based partners such as property management companies or contractors who know their markets inside-out. They'll have valuable insights regarding neighborhood trends that online research might miss—thus enabling informed decision-making while buying assets outside your home state.

In addition to gathering data through people already operating within target locations, consider employing modern tech tools such as real estate data analytics platforms. These provide an in-depth understanding of various factors affecting property values and rental yields across different markets.

While networking can be a long process, remember that it's not about the quantity of contacts you have but their quality.

Don't rush to get a large number of connections. Instead, focus on building meaningful relationships with professionals who are experts in their field.

Chicago commercial propertiesDue Diligence

Performing due diligence is critical in investing in out-of-state commercial real estate. It involves deep research and verification of all potential investment opportunities to ensure that there are not any hidden liabilities or risks that could impede your profitability.

Property Inspection

Carrying out a thorough property inspection is an essential step when looking to invest out-of-state. You can rely on certified commercial property inspectors to assess the structural integrity, zoning compliance, and other factors that may influence your investment decision.

Certified commercial property inspectors can help you assess everything from structural integrity to zoning compliance. They give detailed reports that provide insight into potential maintenance issues or repairs that might affect your investment calculations.

During an inspection report, if something appears questionable, such as "minor" water damage, conduct an investigation. Verify that what is labeled as minor does not conceal a significant problem lurking beneath the surface.

Techniques to Accurately Value Out-of-State Commercial Properties

To accurately value commercial properties in unfamiliar markets requires understanding specific valuation techniques.

These methods include comparing recent sales prices of similar properties (comparables), calculating potential income if leased (income approach) and considering construction costs minus depreciation (cost approach).

The comparables or comps method can be tricky because no two properties are exactly alike. Still, it does provide an overview of how similar properties fared in the market you're considering.

The income approach requires more advanced calculations but is arguably the most relevant. Research vacancy rates in your target areas and rental trends to get an accurate estimate.

The cost approach is a good fit for those who value tangible assets over predictions. It considers the cost of building a similar structure from scratch, depreciated for wear and tear. It's ideal when buying new commercial properties or those with fewer tenants.

Ensuring the Property has Marketable Titles

When investing in commercial real estate outside your state, you will most likely not be present to verify documents manually.

To avoid any issues that might arise in the future, ensure that you have legal counsel to verify all documents and contracts. They will also check for any restrictions or encumbrances on the property.

Learn Essential Real Estate Strategies With Chicago Commercial Property Managers

Out-of-state commercial real estate investment offers an exciting opportunity to diversify your portfolio and tap into new markets. While the benefits are numerous—from potential higher returns to access to more opportunities—it's crucial to approach this investment avenue with a thorough understanding of the inherent risks and challenges.

Familiarizing yourself with the local market, leveraging local expertise, understanding legal and tax implications, and conducting comprehensive due diligence are all crucial steps to ensure the success of your investment.

As with any investment, make informed decisions, seek expert advice when needed, and ensure your choices align with your financial goals.

At Brian Properties, we know how to invest in commercial real estate in another state and can help you navigate these strategies and obstacles.

We offer comprehensive property management services that eliminate the challenges of managing properties from afar. From handling regular maintenance and attending to tenant issues to managing emergencies, we ensure your properties are well-maintained and your tenants are satisfied.

At Brian Properties, your success is our success. If you're interested in learning more about our services, contact us today!

Let's Talk!

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