My husband purchased his first home in 2006. We lived there together until 2012 when both of our jobs moved us to Dubai. That summer we became out-of-state landlords and real estate investors. For three years our tenant paid down our mortgage in Maryland and we saved what we would have paid for housing since work covered our housing costs.
In 2015, we returned to Washington, D.C. and invested in another real estate rental property. This time we invested out-of-state, in Philadelphia. Our goals were to generate cash flow and build our family legacy. We planned for the investment in Philly to be one of many more rental properties.
Don’t get me wrong, I am not implying that being a landlord is simple. It’s not just about renting your house and collecting rent. In fact, in every state, the rules vary and it’s important to educate yourself first. If you are considering investing in an out-of-town real estate property, read these tips first. They will help you make your decision and avoid crucial mistakes.
Real estate investing is a great way to build wealth and is more accessible than you may think. In addition to regular passive income from collecting rent, your mortgage is being paid by another person and all the home equity appreciation is yours to keep. Here are 5 important things to think about when investing in real estate out of state.
Find Someone Knowledgeable You Can Trust
A friend at work told me that she and her husband purchased a home in Philly because they were traveling there every weekend and hotels were more expensive than a mortgage. At first, I thought she was exaggerating. But after hearing about Philadelphia home prices I was asking for her real estate agent’s name to book a date to do my own house hunting.
Our realtor helped us learn more about the Philly market and showed us five properties in various conditions on our first trip. Turns out some row homes in Philly go for as little as $25,000 (think rehab project) to $50,000 (cheapest turnkey options) but they can rent for as much as $800-$1,000 a month. This price-to-rent ratio is favorable for a buy and hold real estate investors like us. You can make all your money back in two to five years if you collect $1,000 a month in rent. Dave, our realtor, was worth every cent of his commission because after he helped us find a house he also recommended contractors. This BiggerPocket’s guide can help you find a realtor who is investor-friendly and trained at purchasing rental properties.
Timing Your Purchase is Critical
We looked for a rental investment property in December, so we had a few things in our favor. First, owners selling in the winter tend to be more anxious to sell, so you can negotiate. Secondly, you have the winter months for any renovations and then can rent in the spring. The time of year can have a notable impact on how easy or hard it will be to find a tenant. We bought a property being sold by a family estate. The previous owner lived there for the past 36 years until he and his wife passed away. The owner’s kids were so anxious to sell they took our offer almost immediately.
The other benefit to buying in the winter and renting in the spring is tax season. Don’t get the connection? Let me explain. In the spring, not only are people looking for their next home before the summer rush, they also get tax refund checks. That makes collecting a first and last month’s rent plus a security deposit easier.
Check Out the Neighbors and the Neighborhood
When house hunting in Philly we didn’t just focus on the homes, but also the neighborhoods. We looked for homes near local shops, restaurants, and schools. We also asked our agent about the renter vs owner ratio. The block where we purchased was mostly owner-occupied and the families decorated for Christmas. This was important because it showed they took care of their block and cared about its cleanliness and upkeep. Our second day at the home we met the block captain who kindly introduced herself and suggested a potential renter once we finished renovations. Read this for more tips on finding an out-of-state property or check out key factors in picking a neighborhood.
Hire a Property Manager or Prepare to Travel
During the renovations, I made several trips to Philly to check on our contractor’s work, file for a renter’s license and turn on utilities. However, I could have saved myself miles and time on the road if I had hired a property manager immediately instead of later and had the company take care of the admin stuff.
Once renovations were done, we hired a property manager. The fees ranged from 7% to 10% of the monthly rent. The price is worth it for us to avoid 3 a.m. phone calls about busted pipes or broken heaters. Our property manager has a 24-hour emergency line, and I am contacted about the issue the next day. By then, most issues are already resolved. Make sure you put the effort in to find a good one and try asking these 20 questions before hiring a property manager.
Learn the Local Laws
I cannot emphasize enough how important it is to learn the local laws of a state before investing in a rental property. Not knowing the rules can get you in a lot of trouble and cost you significant money and headaches. BiggerPocket’s puts state regulations as #1 in their The Top 7 Laws Every Landlord Needs to Study.
For example, in Philly, the owner should keep the water in their name. Philly considers water a tax and not a utility. Therefore, failure to pay can result in a lien on your home. If you authorize a tenant to put the water bill in their name and they stop paying, you would never know until the lien is assessed and you are at risk of losing your home. Hud.gov, the Department of Housing and Urban Development, offers state-specific tenant rights as a starting point.
It’s also important to know what documentation is required to rent a property. Some states or counties require permits to rent. A renter’s license is required for our houses in Maryland and Philadelphia. Both licenses are renewed annually and is an expense we deduct from our income. Without a license, if you have to take a tenant to court you could lose your case just for not having a permit to rent. Finding a real estate attorney or an experienced property manager can ensure you don’t miss these important steps to keeping yourself protected.
Lastly, it helps to know if your state is tenant-friendly or landlord-friendly. This lets you know if the state favors the tenant’s rights or the landlord’s rights when disputes arise. “Tenant-friendly” means it could be difficult to evict tenants for certain reasons or during certain seasons (like winter). Depending on local laws, you may find it difficult to remove a tenant who isn’t paying rent and is squatting in your property. “Landlord-friendly” states allow you to reclaim your property as quickly as possible following lack of rental payment or tenant disputes. For example, Maryland is a landlord-friendly state, while D.C. is known to be tenant-friendly.
Do Your Research & Go For It
When everything was said and done, we were able to find a home for $36,000 that rents for $900 a month. This property provides monthly income and increases our net worth.
Investing in real estate can be beneficial for you and your family. But it’s key to do your homework first. Most people learn from mentors or mistakes. Ask for help from mentors or other investors who have invested in the state you are considering. Use their network for professional referrals, and consider their advice to help you avoid expensive mistakes.
What are your investing tips for out-of-state properties? Would you rather invest in something out of state or rent out your house once you’ve upgraded to a bigger house? Share a comment below and join the community to learn more about topics like this and more.