Alex K is a blogger and real Roofstock customer who purchased three single-family homes in one day without the help of a real estate agent from halfway around the globe. Having recently celebrated his one-year milestone as a rental property owner in April 2018, we asked Alex to unravel some common misconceptions about out-of-state real estate investing.
Myth #1 – Investing out-of-state is risky and shouldn’t be done.
Investing remotely in real estate is a scary idea at first. I don't doubt that for a moment and was in your shoes a year ago (check out our story about buying three homes in one day with Roofstock).
When I first learned about long-distance real estate investing, I thought it was crazy. Taking out a loan for a property outside of your local market? Nope, not going to happen. Owning rental properties hundreds (or in our case, thousands) of miles away? I would have laughed you out of the room.
However, in today's day and age, we have more access to information and services than ever. You can see a house on Google maps—timestamp and all—in a few moments. You can use services like TaskRabbit to have someone go out and take a picture of a home, clean your garage, or run to the store to get paint.
Landlord apps like Property Buddy or RentTracker make it a cinch to keep tabs on things from afar. And marketplaces like Roofstock offer turnkey style homes and help you easily evaluate potential investment properties without seeing them in person first.
When you put these pieces of the puzzle together, you see that out-of-state real estate investing is not so scary after all. Businesses, individuals and real estate companies worldwide often invest at a distance.
They know the potential upside it can have if their real estate market is "too saturated or too hot." Having invested remotely, I can confirm that it is possible to do this. It can be done when you have the right information and team.
Myth #2 – It's important for you to be nearby to deal with maintenance emergencies.
Ahhh, the proverbial 2 a.m. toilet break. A landlord's worst nightmare, right? Personally, I've never run into anyone who has had this actually happen to them. This is one of the anecdotes that is shared around the dinner table from a friend of a second cousin's brother's uncle.
Some real six degrees of Kevin Bacon story right there.
When it comes to maintenance, the reality is often very different. Chances are, the stereotypical issues that people causally associate with landlording will be completely different from what you experience.
HVAC issues and freezing pipes were the soup du jour of common problems that we faced last year. This year, who knows what it will be.
Systems and teams are what will make or break you in being successful. Set them up no matter where you are located.
I'll talk more about property managers below, but they are so helpful with maintenance. They handle the calls for you and have the Rolodex of contacts who can get things fixed ASAP. With the right team, fixing these things from a distance is no big deal.
>>Related: The role of the residential property management company
Plus, the toilet does not care where you physically are or who is going to fix it. If it breaks, it breaks at the most inopportune time, and that is that. And even if you do live near your rental property, that doesn't mean you know how to fix something or know someone who can hop over in a jiffy.
Systems and teams are what will make or break you in being successful. Set them up no matter where you are located.
Myth #3 – Tenants will tear up your home and leave during the night.
Unlike the 2 a.m. toilet fix, almost everyone knows someone with a real story where copper wire was pulled out of a home or a tenant left in the middle of the night. It happens from time to time around the rental property space.
You can mitigate this by having an excellent property management company in place AND by reviewing tenants' information once they have completed the screening process with your property manager. This will help you avoid these kinds of scenarios.
"But this won't happen to me because my rental property is only 10 minutes away!"
I understand your concern, but I don't buy the argument that a tenant is more likely to tear up your home and leave in the night because the property is 10 hours and not 10 minutes away.
You or your property manager would still have to check on it each day if that was the case. No one would be investing in rental properties if this was the norm.
Myth #4 – Property management is too expensive and thus not worth it.
I believe you should build property management into your analysis when evaluating potential real estate investments. (Tip: Roofstock factors in an 8% property management fee into the projected return on investment metrics for all of the investment properties on its marketplace, so you don't have to do the number crunching).
While you might manage it now because the house is next door, I genuinely don't believe that you can accurately predict what future you will want or physically will be able to do in the next 10, 20 or 30 years.
>>Related: When should you hire a property management company?
Still not convinced? Check out my experience below.
Over the last 12 months, we spent about $4,000 on property management fees which included placing one new tenant across our four rental properties. Two notes on this:
- We have a property manager that charges the first month's rent for placing a new tenant. 75%-100% of the first month's rent is a pretty standard placement fee.
- We did not have to pay placement fees for the Roofstock rentals we purchased because tenants were in place throughout the selling/acquisition process. This saved us $3,000 in placement fees, easy.
On top of that, not once did I have to do any of the following:
- Collect rent
- Deposit rent
- Call the HVAC repair company three times
- Call a plumber two times
- Oversee a rehab
- Record, collect and send images of all repairs
- Contact, send, manage and process new lease paperwork
- Schedule an annual inspection
- Schedule annual pest control
- Market a property for rent
In total with emails, phone calls, and signing off on a few repairs that were over our pre-approved spending limit, I spent less than 10 hours TOTAL managing our four rental properties last year. That to me is worth the $4,000 we paid to have property managers handle all of the above, rather than trying to handle everything ourselves. I want passive income, not another job.
A lot of people look at property management and say that 6-12% of your monthly rent is way too much to pay someone. You might see our costs and say that I'm crazy for letting that into my cash flow. I disagree. My time is valuable, and so is yours.
Plus, chances are you probably aren’t that great at it anyways. Leave it to the professionals and do what you are good at. In many cases, a professional property manager can help save you money by avoiding problems that could lead to legal fees, vacancies, and damages related to mishandled repairs.
>>Related: How much do property managers charge? Fees and what to expect
Myth #5 – You're going to get ripped off on repairs.
When I first started out as a real estate investor, something that I was anxious about was the costs associated with repairs. I had a rough idea of what it costs to purchase and install carpet, but no idea what it costs to replace a pressure release valve, replace a blower in an AC unit, or fix a frozen copper pipe.
It turns out over the last year I did learn what it costs to replace all the items above. This is one reason that we have a property manager. (Check out this excellent article about what a property manager does if you are not already familiar.)
Your property manager should either have someone in-house or an external contractor they work with who is highly reputable and offers competitive rates. They got a guy, you know?
So what else can you do if you are worried about repair costs?
One of the great things about this whole internet age is that we have more access to historical pricing for repairs than ever. Bigger Pockets has multiple forums about repairs, costs, market contacts, etc. I've also found sites like Homewyse.com and Homeadvisor.com that allow you to get national averages, as well as averages for your zip code.
Angie's List is another great resource to utilize if you're vetting contractors yourself. Use these sites to see if you want to verify that you're paying fair rates for maintenance and repairs.
Granted, I'm not saying all this is easy or there aren't emotions here. Take this true story from a few months back where it did take me a minute to get over one repair cost.
We had a toilet that needed to essentially be rebuilt and reseated because it was poorly done in the first place. This is something that I've personally done before, so when the quote came in at ~$200 it seemed crazy. After my few minutes of concern, a little panic, and a "what the heck" kind of feeling, the fog began to clear.
For starters, I did a little online due diligence and found the price we were quoted was in the range for the area, albeit on the higher side. Second, I remembered that the property is a little farther out from the city center so not every plumber is excited to travel out that way.
Lastly, I remembered that I didn't actually have to do anything. Sure, I could do it for the parts and free labor, but I wouldn't have done that if it was 10 minutes away, nonetheless halfway around the world.
*****
Out-of-state real estate investing can sound daunting to the uninitiated, but the availability of tools and data combined with the right partners opens up a whole new world of possibilities. Hopefully some of the myth busting in this blog post will give you the added confidence to look outside your own backyard for great investment opportunities.
