Some of the top 10 real estate markets for 2022 are in states like Arizona, Florida, North Carolina, and Texas. These are states with growing populations and economies, great quality of life, and strong demand for rental property.
Even if an investor doesn’t live in one of the best states for real estate, it’s doable to purchase and manage out-of-state rental property. While there is additional planning involved, the reward could be worth the extra effort.
Key takeaways
- Reasons to invest in out-of-state rental property include the ability to purchase homes at affordable prices, the freedom to implement a desired real estate strategy, and the potential to diversify an investment portfolio.
- Challenges of owning out-of-state rental property include the need to learn about the local market and landlord-tenant laws, the work of developing a system to take care of the property and tenants, and the need to collect rent on time.
- Steps for managing an out-of-state rental property often include building a local maintenance team, automating and doing as much as possible online, and performing routine property inspections.
Why invest in out-of-state rental property?
It’s logical to ask why many people invest in out-of-state rental property when they could just as easily buy a home in their own city. However, just because something is easy doesn’t mean it’s the best investment.
Here are 4 reasons to invest in out-of-state rental property:
- Affordability: Finding an investment property that offers a profitable return is becoming increasingly difficult for people who live in large urban areas with rapidly rising housing prices. Smaller secondary and tertiary cities often have more affordable home prices with a large percentage of renters.
- Diversification: Investing in out-of-state rental property also helps investors avoid putting all their eggs in one basket, so to speak. Building a portfolio of rental properties in different states may smooth out cash flows and increase overall potential returns.
- Market: Individual real estate markets historically shift from buyer’s markets to balanced markets to seller’s markets over a period of time. Rather than hoping and waiting for the dynamics of the home market to change, an investor can go online and search for rental property in markets that favor buyers.
- Strategy: All investors have their favorite strategies, such as buying and holding single-family rental (SFR) property, owning small multifamily properties, or investing in short-term vacation rentals. While most places have these types of properties, not all offer the same potential returns. For example, an investor who lives in Chicago may find it makes financial sense to purchase a vacation rental in a year-round destination location, like Florida.
While there are good reasons to buy an out-of-state rental property, there are challenges to be aware of.
First, all real estate markets are unique, and some may be better rental markets than others. It takes time, effort, and research to understand market values and trends that may increase or decrease return on investment (ROI).
Next, landlord-tenant laws differ from state to state, and sometimes even from city to city within the same state. Rules and regulations for screening tenants, raising rents, and declining to renew lease agreements can catch investors off guard if they don’t ask the right questions.
Third, in order to successfully invest out of state, it’s important to have a plan in place for screening tenants, taking care of the property, and collecting the rent on time. While these issues also apply to locally owned property, they can be more of a challenge for out-of-state landlords.
Despite these potential drawbacks, the most successful real estate investors understand how to overcome obstacles and turn challenges into opportunities. In the next section, we’ll walk through steps to make the most from an out-of-state rental property investment.
How to manage out-of-state rental property
Here are 9 general steps to follow to manage out-of-state rental property:
1. Understand the market
Each state has different landlord-tenant laws investors should know and understand before buying a real estate investment
For example, states such as Georgia, Texas, and Arizona are known for being more landlord-friendly, with laws that favor landlords or treat landlords and tenants fairly and equally. On the other hand, Vermont and Oregon are 2 of the most tenant-friendly states.
A local real estate attorney, property management company, and online resources like Nolo.com are good ways to learn about specific laws.
2. Build a local maintenance team
Maintenance tasks such as making repairs, landscaping, pest control, and seasonal servicing of a heating and cooling system are generally a landlord’s responsibility. That’s why it’s important to have a list of trusted, go-to local service providers to perform routine maintenance and make emergency after-hours repairs.
Asking for recommendations from fellow real estate investors, conducting phone interviews, and speaking with references are some techniques for building a solid local maintenance team.
An investor may wish to consider purchasing a home warranty for a rental property, making sure to read the warranty contract thoroughly to understand what’s covered.
3. Use online services
Tenant screening services such as Avail and TurboTenant make it easy to market a vacant property, collect applications, screen tenants, sign leases, and collect rent online.
Most online screening services give a landlord the option of having a prospective tenant pay for screening. Collecting the monthly rent online is usually free for a landlord, while tenants may pay a small convenience fee, and funds are deposited in a landlord’s business account within 1 to 2 business days.
4. Have a local contact
Once a tenant has been qualified to rent, they’ll want to see the inside of their new home. If possible, have a trusted local contact meet the tenant to conduct a property tour and complete a move-in checklist.
A local contact can be a friend, family member, or real estate concierge who is paid by the hour. Having someone meet a tenant in person also can give a tenant more peace of mind.
5. Automate as much as possible
Automation improves out-of-state rental property management by reducing the amount of manual work a landlord and tenant have to do.
Some renters are used to doing nearly everything online. Giving tenants the option for paying rent and making maintenance requests online can improve cash flow and keep tenant turnover low.
Landlords who sign up for a free account with Stessa, a Roofstock company, can make their lives easier by automatically tracking income and expenses, monitoring property activity online in real time via the owner’s dashboard, and exporting tax-ready financials. While Stessa doesn’t file landlord tax returns, it does the next best thing by providing an exclusive TurboTax discount in the Stessa Tax Center.
6. Be easy to contact
People have gotten used to using video calls and online chats. A landlord can set the right expectations with a tenant by letting the tenant know the best way to stay in touch and when to expect a response. Many landlords also set up a second phone number strictly for business use and emergencies.
7. Perform routine inspections
Routinely inspecting a rental property inside and out can help investors identify maintenance issues and ensure that a tenant is taking care of the property.
Property inspections also are a good way to discover if a tenant has an unauthorized roommate or pet. Many landlords conduct semi-annual inspections and use the opportunities to complete seasonal service work on a heating and cooling system or winterize a home.
8. Consider hiring a local property manager
A local property management company can take care of daily tasks like tenant communication and repairs. In most states, property managers are required to hold a real estate license and to attend continuing education classes and be familiar with landlord-tenant and fair housing laws.
Many investors find that hiring a property management company provides more peace of mind and allows for more time to focus on building a property portfolio.
9. Visit the property in person
Even with the best automation systems in place and a local property manager, most landlords still visit out-of-state rental property at least once a year. Seeing the property in person is a good way to make sure everything is being taken care of, spend time with the property manager, and meet the tenant if an investor wishes.
