Three years ago, I purchased my first investment property. It was a two-family home in the Boston area that I would live in and rent the other unit for additional income. Of course there have been hiccups, but by and large, the investment has worked out well for me. Now, I’m itching to buy a second investment property in the area. The trouble is, Boston has bounced back feverishly from the recession and prices are through the roof. This has me asking, should I start looking for investment property elsewhere?
Being a long-distance landlord is intimidating, particularly for me as a novice real estate investor. I quickly realized that I had to weigh the pros and cons of long-distance rentals.
The Pros of Buying a Long-Distance Rental
- The ability to buy in more affordable markets. Property values in second- and third-tier markets don’t command the premium of real estate in primary markets, and there’s less competition. That said, depending on the market, rents can still be very strong. Buying in one of these markets is a way to get your foot in the door, realize positive cash flow, and build equity.
- Real estate as a long-term strategy. Some investors decide to buy real estate in an area that they don’t currently live in, but think they might want to someday. For instance, I’d consider buying a home closer to my parents if there’s a chance I’ll want to live closer to them eventually. Many investors use a similar mindset when considering real estate in vacation and retirement markets, like the Carolinas and Florida. These houses can be rented now and held in case an investor wants to live there someday, too.
- Tax benefits. Say what you want about Trump, but when the New York Times released a copy of his 1995 tax returns, it shed light on a stark reality: real estate investors are able to use the tax code to their advantage. The ability to write off interest paid on a mortgage and depreciation makes buying investment property highly attractive. The provision Trump took advantage of is no different than the loopholes that everyday investors use, too.
The Cons of Buying a Long-Distance Rental
- Less familiarity with the market. Let’s face it: I know the Boston-area real estate market better than I know any other market. I feel highly confident in how much local taxes cost, how much I can get for rent, the types of tenants I can get, etc. But in a different market? I’m not so sure. I can do some research, but it’s not the same as having lived and breathed a real estate market for decades. That can make some investors uneasy.
- Limited network of service providers. If I were to buy a property in Boston, I’d know exactly who to call for my mortgage, to do my home inspection, etc. My network of service providers is much smaller in a different market. This is true even after purchasing an investment property. If something goes wrong, I might be turning to the white pages for a plumber or electrician and crossing my fingers that they’re well-qualified.
- Day-to-day reliance on others. Being a long-distance landlord means that much of the day-to-day activity is out of your control. You can’t just stop by and check out the house on your way home from work. If you have friends or family in the area, you might ask them to help you find tenants, to collect rent, or to stop by in the event that repairs are needed. However, most professional real estate investors know that the most reliable way to manage property from a distance is to hire a property management company. This is an additional monthly expense that prospective buyers should keep in mind as they run their numbers.
Long-Distance Rentals: 7 Vital Tips for Success
The decision to invest in long-distance rentals isn’t an easy one; but if that’s the route you decide to take, here are a number of things to keep in mind:
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- Don’t jump into a new market blindly. Do your research early on and study market comps. You’ll want to be sure you aren’t overpaying for the property, and the rents that the seller is getting now can be supported over time.
- Get a strong grasp on the condition of the property. The inspection will help you understand the true condition of the property and shed light on repairs that might be needed. Buying a fixer-upper in an unfamiliar market could pose problems if you don’t have a wide network of service providers. It’s much different than buying a property locally when you have the advantage of popping in to check on it every so often.
- Find great tenants. Anyone who owns long-distance rentals knows that good tenants are worth their weight in gold. Nit-picky tenants, or those who don’t pay their rent on time, can make managing the property more difficult. Sometimes it’s worth taking less in rent from all-star tenants if you’re managing the property from a distance.
- Automate rental payments and lease renewals. There’s all sorts of property management software out there that makes it easier for landlords to collect rent remotely, to manage maintenance requests, to renew leases, etc. Invest in a solution that meets your needs.
- Schedule routine maintenance. If you own long-distance rentals, you’ll want to find someone in the area who can mow the lawn, trim the hedges, replace your HVAC filters, plow snow, etc. This could be a friend, family member or trusty handyman, but honestly, we’d recommend…
- Hire a property manager. Yes, it’s an additional monthly expense. However, having a property manager will relieve you from day-to-day responsibilities and give you peace of mind when owning real estate from a distance.
- When possible, check on your property yourself. Try to make it a habit of visiting long-distance rentals every year or so. Even with a rock-star property manager, you can’t forget that this is a big investment. Another set of eyes never hurts.
Supervising long-distance rentals can be difficult, but it’s doable—and it typically gets easier with time, particularly if you buy multiple properties in the same long-distance market. As long as you’re prepared for emergencies, long-distance rentals can be a wonderful addition to your investment portfolio.Read more on Scaling