Nov 22, 2022

Investing in Out-of-State Net Lease Real Estate

written by Robert Edwards

The area you live in may not be the best area to invest. Is it nice to be able to drive by your property and attend to any issues directly? Absolutely.

But your local market may not deliver the best cash on cash returns or appreciation. For example, if you live in California, cap rates and cash on cash returns may be lower than elsewhere in the country. As a result, investing out-of-state can open far more lucrative opportunities for commercial real estate investors, and net leases can make out-of-state investing even more manageable.

Net leases are commercial lease agreements in which a tenant agrees to pay a portion or all of the property taxes, building insurance, and maintenance expenses in addition to their base rent. This type of lease is commonly used for commercial real estate investment properties, such as restaurants or retail stores. Commercial investors like net leases because they often offer a more hands-off investment, can generate a high return, and provide a higher level of security and future profitability.

How to choose out-of-state net lease investment properties.

When investing in net lease real estate out of your area, you want to select geographic areas experiencing population and job growth. Consider where corporations are relocating to, growing industries, and other major population draws.

Diversifying a rental property portfolio with markets that best match your investment strategy is important. For example, some regions will offer better cash on cash returns, while others may be positioned for high appreciation. Alternatively, investors often select properties based on an internal rate of return over the holding period.

For commercial real estate investors, one of the key considerations is the cost of rent and operating expenses. In general, markets with fewer regulations, lower property taxes, and landlord-friendly laws tend to be more favorable for landlords. As a result, these markets often have lower rents and operating expenses. This can provide a significant advantage for investors looking to maximize their return on investment. Of course, there are other factors to consider when choosing an investment property, but for those focused on bottom-line costs, markets with fewer regulations and lower taxes are often the best bet.

How to invest in net lease commercial real estate out-of-state.

Any real estate investment is significant, and you don't want to dive into a net lease without completing your due diligence. Out-of-state commercial real estate investors need to take a few extra steps before making an offer. First, engage a national brokerage company like Blue West Capital. A national brokerage company will be able to help connect you with the professionals you need on your team, provide market analysis, and the resources you need to make a smart investment decision.

Second, it’s important to visit the property in person. Walk through the area, see what other businesses are nearby, and get a feel for the community.

Third, you want to put together a local team. Start by hiring knowledgeable attorneys who know the local laws and customs. Their expertise could save or make your investment and help you avoid any potential legal pitfalls down the road. Don't fall into the common trap of thinking you can do all your due diligence independently. You also want to hire qualified inspectors, engineers, and appraisers to assess the property's condition. These professionals will help bring to light any deferred maintenance or potential risks associated with the physical asset.

Understanding the market and active trends is essential for any kind of real estate investing. Consult with local leasing brokers, banks, and economic development authorities to better understand the market. Make sure you understand demographic trends, access rights, and traffic counts in the area to insure the property’s attributes will help the tenant scale their business for many years to come.

When should you invest out-of-state?

Investing out-of-state can be done at any point in your real estate investment journey. It's always recommended to keep an eye out for attractive investment opportunities because they can pop up in any market. However, in today's economic environment with high interest rates, cash availability makes a considerable difference on returns and a property's future cash flow. If you're considering investing out-of-state, a great time would be when you have excess cash from a major financial liquidity event or when you're fulfilling a 1031 tax differed exchange.

If you have more questions about in state or out-of-state net lease investments, or are ready to start exploring commercial real estate investment opportunities, please reach out to Robert Edwards of Blue West Capital.


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