Challenges with Investing Out of State

Investing in your own back yard can be a challenge at times. Home prices may be extremely high, forcing forcing you to bring more money to the table when purchasing a deal. On top of this, rent values might not be high enough to cover the expenses of owning that property causing the deal to not cash flow. This can leave many investors to look out of state when looking for their next real estate investment. My story is a little different. Currently, I live in Indiana but go to college in Kentucky. Both markets are excellent to invest in but I would like to start in the market where I am going to school. This is presenting a slight roadblock in my journey to accomplish my next M.I.N.S.

My next M.I.N.S. has to deal with financing. I am looking to partner with my first investment because I will not be able to qualify for a loan on my own. I have no source of income because I am a college student and my credit is not excellent because I just opened up my first credit card this year. I will eventually get a high enough paying job and my credit score will raise over time but that is the problem. I simply do not want to wait to get into the game any longer. Since, I cannot invest entirely on my own for probably another 2 years I am going to form a partnership.

My partnership is going to be with my dad. I am really looking forward to this partnership because he has great expertise with purchasing properties and it will just be really cool to invest with my family. Not only do I know and want to benefit from real estate but I want my family to experience the same things. One major problem with investing in this way is my dad is self employed and might struggle to qualify for a loan since banks typically look to loan money to those with W-2 jobs.

We are looking at combating this problem by creating an LLC so that we can avoid our finances all together and have the banks look to our LLC’s properties for financial data. We will use the LLC to get a commercial loan such as a DSCR loan. A DSCR loan is a loan product which looks at the property’s performance for qualification of the loan. This product will take into account the income source of rents and the expenses to qualify a business for the loan.

We have decided to create an LLC but yet another problem as come up. The problem is as to where we are going to create the LLC. If we create it in our home state of Indiana we will be considered a foreign LLC in Kentucky. This means we must register with the state as a foreign LLC which will cost more money. There is also the potential for double taxation but this is not guaranteed. If we decide to create the LLC in Kentucky we might run into some issues because neither of us are residents in the state. The double taxation issue might also occur in this situation but is not guaranteed.

One way to combat this issue is to use a combination of an LLC and a land trust. The land trust will be set up in the state of Kentucky and directly own the property. Everything else will be run through the LLC in Indiana. This way we will have a combination of limited liability and anonymity when owning this deal. Also with the land trust, we will not trigger any due on sale clause and be able to transfer taxes.

There have been numerous setbacks on this journey to begin investing in real estate but I know that it will all be worth it. If it were easy, everyone would do it. I am not going to stop when the going gets tough and will continue working hard to begin investing. Don’t stop when a challenge comes your way. Take it in stride and keep moving forward.