What Do You Think of Beginners Owning Out-of-State Rentals?

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One of my blog readers emailed me to ask:

“What do you think of owning out-of-state rental property? I live in WA state, and inspired by your blog posts, I am looking for rentals to invest in Atlanta. Do you think this is practically do-able?”

The short answer: It’s definitely do-able. But it may or may not be something you WANT to tackle.

Plenty of people are successful out-of-state landlords. Plenty have also gotten burned by the process, which turned out to be more difficult than anticipated.

Here are a few questions I’d encourage the reader to consider before taking the leap into out-of-state landlording.

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#1: Have You Ever Owned a Home?

And I don’t mean, “Have you ever owned a new-construction condo?” I mean, have you ever owned a structure that needs pest control, termite treatment, roof shingle repair, gutter cleaning, hot-water-heater replacement, dishwasher installation and midnight plumbing?

I made the mistake of becoming a landlord with my very first property. I had never owned property before, and suddenly I was responsible for overseeing the renovations on a 100-year-old triplex AND simultaneously managing three units of tenants who had grown accustomed to the previous lackadaisical landlord.

That experience gave me a quick crash course in home ownership (who knew you needed to think about drainage?). My only saving grace was my flexible, work-from-home day job, coupled with the fact that I lived across the street (and later moved into one of the units). Even still, I wanted to rip my hair out.

If you’ve never owned a home before – not even your primary residence – I’d caution you against becoming an out-of-state landlord with your first property.

And I’d very strongly caution you against buying an out-of-state fixer-upper.

Which leads to my next point …

#2: Do You Have Landlording Experience?

If you’ve never managed tenants before, I’d generally encourage you to try landlording in your own backyard before venturing into out-of-state property investing.

Notice that I said the word “encourage.” I DO think you could become a successful out-of-state landlord on your very first investment property, particularly if you have a trustworthy team established in the area where you’ll be investing. At minimum, you should have the world’s most awesome property manager, a good real estate agent who has experience working with buy-and-hold investors, and a trustworthy contractor.

I’ll award you extra bonus points if you’ve had exposure to the daily life of property investing (e.g. if your parents were landlords and you grew up watching their experience). If that’s your situation, you probably have a decent idea of what to expect.

#3: How Strong Is Your Team?

Do you understand the neighborhoods in the area that you’re eyeing? Have you ever visited the area? Do you have a strong idea of the neighborhood and tenant profiles?

Do you have a trustworthy, experienced property manager on speed-dial? Are you fluent in “construction-speak,” so that you can understand the jargon that contractors use? (Pop quiz: Do you know what a joist is? How about a toilet flange?)

Is your cash flow strong enough that you’ll be able to withstand lower rents and higher maintenance/vacancy costs than you anticipated?

Do you have a mentor who you can consult when you need help? Perhaps a friend with experience managing properties, or a parent or uncle/aunt who has been through this experience in the past?

This sub-section of questions is probably the most important. If you’ve never owned a primary residence home before, but you have the world’s most trustworthy mentors and managers, plus a deal that cash flows like crazy even with the most conservative estimates, then go for it. Buy an out-of-state fixer-upper rental, and enjoy the profits.

But that situation is rare. As a novice, you’ll most likely find an average deal managed by an average team. And in that situation, I’d encourage you to first own your primary residence, then try becoming a landlord within your own state, and then only graduate to out-of-state rentals.

****

BiggerPockets readers, what do you think? Did you own an out-of-state property early within your landlording career? What would you recommend to a beginner who wants to be an out-of-state landlord?

Photo: Ryan Dickey

About Author

Paula Pant

Paula Pant quit her 9-to-5 job, invested in 7 rental units, and traveled to 32 countries. Her blog, Afford Anything, shares how to shatter limits, build wealth and maximize life. (At AffordAnything.com, she shares EXACT numbers from all her rental investments -- costs, cash flow, cap rate; it's all published for the world to read.) Afford Anything is a gathering spot for a tribe dedicated to ditching the cubicle. Read her blog, and join the revolution.

38 Comments

  1. I have been involved with rental and fix and flip properties for years and in many states.

    I am pretty savvy and an expert in1031 Exchanging and using an IRA to but real estate.

    To the point, I do NOT think most people should invest in out-off-state rental properties for a myriad of reasons and probably the biggest one is distance. How do you know it is the truth when a Tenant tells you a faucet leaks and it will only be $75.00 to fix it which he will deduct from the rent, or a roof repair is necessary and will only cost $750 when the roof doesn’t need any repairs?

    Yes, you could employ a Property Management Company but there goes 10% of your revenues right off the top and many Property Management Companies leave a lot to be desired. I remember a Property Management Company charged $35.00 each to replace the batteries for smoke detectors for a six unit, e.g. six x $35.00. At that time you could buy a new smoke detector at WalMart for $15.00 each. When I confronted the Company I was told the drive time to get to and from the property was included in the price. The Property Management Company was 5 minutes from the six unit apartment house. Upon closer investigation I also learned the Repair Company that charged me $35.00 for batteries for each smoke detector was owned by … yep, the wife of the owner of the Property Management Company.

    Unless there are super compelling reason to invest elsewhere stay in your own backyard where when a Tenant claims a dripping faucet needs repairng you can do it or hire someone to do it and be there when the work is done.

    • I think that one of the biggest dangers for a novice is that they don’t yet have a good idea of how much something is supposed to cost, so they might not see the “red flags” of a potential contractor or property manager ripping them off.

    • Brett Pedigo on

      This sounds like great advice. I am in a pickle. I am a few months out from trying to buy a rental, but I live in Los Angeles. There’s no way possible to buy one around me. So I wanted to try Las Vegas or Phoenix. Wht would your advice be. Thank you!

      Brett

  2. I have a great property management company and also bought top notch properties in Texas while I live in Tennessee.

    In my backyard, rents don’t exceed $9/sqft/year. And that was if you found top stuff and had no vacancy. In the Austin area, the units I bought have been yielding $12/sqft/year. Subtract 10% for the management fee (which would be $1.20/sqft/year), and I still have $10.80/sqft/year, which is better than my own backyard. For the first six months, I had 75% occupancy (and still had great positive cash flow), but that was partly due to those units being new. We have finally reached 100% occupancy, and in fact just rolled over one unit to new tenants with no hiccup.

    Jeff Brown, aka Bawld Guy, helped me find these units as well as the property management company. I flew out to inspect them myself before buying while also meeting the owner of the management company. I also hired a licensed home inspector to check them out before purchase in order to conduct due diligence. The property management company I use interacts with me well. Sometimes I call them with questions; sometimes they alert me to issues to be handled.

    Having a top notch team is critical to doing this. When we had issues getting the units filled, we hired a pro to find tenants rather than cut the rent rates, and it has paid off.

    How often do I need to drive by and check things out? Hardly at all. It doesn’t mean everything long distance will work. But I’d rather invest in a state where the jobs are growing faster than all other states combined than work with less than ideal property in my backyard, just so I can drive by it every six months.

    • Hey Greg,

      I have never heard of using $/sqft/year before.
      Can you explain the meaning of the metric a bit to me?

      On its surface I don’t see what it would really tell you.
      For example I have a place (near where I live) that I would get like $26.50/sqft/year in rent. I don’t make any money on it.
      I have a place (Out of state) that I get about $3.50/sqft/year and cashflows over $400/month.
      Cash outlay for the 2 were similar.

      I have seen your posts on BP before and think you know what you are talking about so I assume I am missing something.

      • The properties I own in Austin, TX cost about $136,000 a piece. The monthly rents are $1325 and the square footage around 1300 sq. ft. That makes the rent about $1/sqft every month. Multiply that by 12 months, and it comes to $12/sqft/year, which I mentioned in my prior posting. It also conveniently matches up to the 1% rule where the monthly rent is about 1% of the total purchase price.

        In the middle Tennessee area, a property of the same size and price seems to max out in the $900s, which comes to around $9/sqft/year. Essentially, I could have invested the same amount of capital in my backyard but would have taken a 25% cut in total rent.

        $/sqft/year can be a bit crude. But it’s a quick-and-handy way to compare two different properties. It’s not where my investment decisions end, but instead where they begin. I use it to level the playing field when looking at two different unit. But it presumes other factors are kind of the same, like bed & batch configurations.

        When you jump markets, though, you might see big differences. The units I bought, which have higher rents, also have double garages on each side of the duplex and are brand spanking new, meaning less deferred maintenance. The floors are solid tile along with brick exterior, increasing the durability. All these factors outrank the 4-plex apartment complex I investigated a couple years ago, which only had single garages and would only yield $9/sqft/year. My father-in-law, who owns over 20 units in my backyard has pointed out you can’t get more than $900 for similarly sized units.

        So I made the leap to invest in Texas, and with a solid real estate broker, mortgage broker, property management company, and licensed home inspector, I was able to exact the right due diligence. I flew out to check things out and met the builders and the property manager on site. Buying real estate, local or remote, requires incredible due diligence. Never forget: you don’t have to travel across the country to engage in blind faith.

        • Hey Greg,

          Okay well that makes sense if the properties are of similar size and price.
          In my examples the specs on one were:
          $1500/month, 668sqft but cost about $240K with purchase and rehab.
          The other was:
          $650/month, ~2200sqft but only cost a tad under $30K all in.

          So a little too much variability in the properties to use that! 🙂

    • Hi Greg,

      I saw your reply regarding your Texas property on the big pockets real estate blog and was wondering if you could give me advice. I live in San Diego and would like to buy a rental home in TX. Could you let me know with whom you’ve been working?

      I only have 125k to invest and Id have to finance anything close to me in SD, so Id start off in tthe red here. My best friend lives in Houston, so I can stay with her any time. I think Texas might work for me, but I really want to protect myself.
      Thanks! Heather Taylor

  3. Thanks Paula! Buying property out of state does provide some opportunity in home markets in areas such as Florida or Las Vegas, NV where the prices are volatile and if you buy at the bottom and sell at the top you can make quite a lot of money. Plus the rent in these areas are high (higher then where I live) so it is tempting. I have not purchased in another state yet because it does require that you have a property manager in that state that you can trust and I just have not jumped in yet.

  4. Great post Paula! In my town housing is getting to be much too expensive to be cost-effective in buying rentals. I got lucky with my first one last year but there is no way I’ll pay the prices now. Even REO properties and major fixer-uppers are priced well over 100k and they go fast. People here are actually paying these prices so there isn’t even room for negotiation. But another worry is that my town’s biggest employer is the air force base and there is talk about downsizing it so that is another reason why I won’t buy here again. I agree, if you have a great property management company or trustworthy contractor and you do your due diligence in searching out-of-state properties you can be successful.

  5. Ali Boone

    I will say that I agree that it is a bad idea for beginner’s to invest out of state if the properties they buy need any work or there is a lack of familiarity with the area or teams on the ground there to handle everything. I would even say that is true for more advanced investors.

    However, if you go a route like buying the turnkey rental properties (fully rehabbed properties, tenants in place, and property management in place), those can actually be the best bet for beginning investors even over buying in their local area. The only trick is knowing the reputable turnkey companies to work with, but once you know those, you are golden.

    The risks in real estate investing, specifically for buy and holds / rental properties are: having to spend more than expected in repairs, having contractors take advantage of you which can cost a fortune, having bad tenants who destroy your property and stop paying rent, and having property managers (if applicable) who take advantage of you. All of these risks can be mitigated if you have the right people in place. With turnkeys, you get rid of the risk of having unexpected repair costs altogether, contractors can’t take advantage of you because there are no contractors in the equation, and with the right property manager in place, they deal with the tenants. So in all of this, you only have to make sure you have the good property manager. That is 10x easier than buying a house near your area and rehabbing and landlording itself, even though you trust yourself. Just because you trust yourself doesn’t mean you can trust contractors or tenants.

    There is no reason for a beginner investor to lose out on the best returns, which are likely not in their local area, just because out of state investing seems scary. In fact, it is arguably much easier than any other way, at least if you go the turnkey route. That’s the only route I go, and the advantage of me doing that is that I can always get the best returns available because I’m not specific to one market. The market with the best returns is always changing, so if I’m not changing with it, I’m leaving money on the table.

  6. Great article, and words of wisdom in the comments, especially Tom’s opening comment. 100% agreed.

    You know what an out-of-state landlord becomes? The “absentee out-of-state” owners that so many of us target with direct mail because many of them have HAD IT with the headaches of being an out-of-state landlord!

  7. Mike McKinzie on

    This is an excellent article, all very good advice. I own property in several states but started with a rental close to home. Then I ran a Property Management Company where I managed around 100 units by myself and with no computers. I would add that after owning a nearby rental, it might not be a bad idea to own one 2-4 hours away to start your “out of area” investing. That way, if you absolutely have to, you can get to the location. As for me, I have owned homes for decades and never saw them once. And I never pay 10% management fee, or even 9%. My average is 7%. So is paying $70 a month to have a $1,000 a month rental managed? ABSOLUTELY. My time is worth double that per hour and I sure don’t want to spend a hour a month collecting rent, inspecting the property and having the tenant call me in the middle of the night because the bathroom light bulb burned out.

    I have no headaches with my out of state rentals but I do agree with Dev Horn about getting the infamous “yellow letters” all the time. When I do answer them, I tell them I want 25% ABOVE retail if they want to buy it as it is making me a LOT of money. No takers yet.

    Don’t be afraid of out of area investments, they can be very lucrative. But make sure you know what you are doing, there are a lot of scammers out there offering “turnkey” investments that are no more than “beach front property in Kansas.”

  8. I began my real estate journey as a rookie with out of state property. It all comes down to your team and screening your team properly. My intent is to run a 100% passive real estatement business and I have that now. I spend less than 30 minutes a month dealing with real estate.. and that time is going over reports from my property manager.

    Yes, it takes a bit of upfront work, but the return on investment is greater than being an active landlord. I currently own 4 properties (4 units) and closing on 2 more within 45 days to bring me to 6 properties and 8 units. Regadless if the property is in your backyard or not there will be a learning curve, I wouldn’t change the way I done it for the world.

    I say… do it, creat your criteria from your lessons learns and start with the end in mind.

  9. I am an out of state investor, actually out of the continent. I live in Uruguay, southamerica, and I own some townhomes in south orlando suburbs, and several townhomes and detached homes in north atlanta suburbs. In both I have realtor that acted as buyer agent and now act as property manager. I traveled and interviewed a few in each city before contrating them. I pay them full commissions, that is 1 month rent a year and half a month on contract extensions, plus 10% gross rent a month. For repairs, the Orlando realtor has his own crew and charges me very competitive fees when needed. Of course he makes a profit with the repairs, but as long as I pay competitive cost for a well done job I am ok. In Atlanta, my realtor charges me 10% commission for contractor/supplier management when something is needed. Since he lives in an affluent neighbourhood, I end up paying a lot on repair expenses, you know, a rich realtor calls a painter for his foreign investor and the painter charges as much as he can…not really happy about that. But I am making 7/8% cash on cash from rental income on both cities, since atlanta hoa fees are lower than Orlando.
    Bottom line, if you find a trustable realtor and you are ready to pay for his work, you can invest from out of town with no headaches and reasonable returns. The other thing to watch would be to buy good properties at a good price so you can make a profti when you sell.
    I hope this helps and let me know if you need more data.
    good luck
    aldo

    • Aldo,

      Hello from your neighbor.

      My wife and I live in Argentina six months a year tending to our vineyards in San Rafael but when we are in the USA we live in Miami.

      We represent Miami Condo Developers who offer 3 Year Guaranteed Lease back programs paying 6% on your money and the Developer pays the HOA Fees, property taxes etc.

      If you have interest let me know.

      Sincerely,

      Tom

      should look at properties in Miami

  10. I think a beginner can own out of state, I see it all the time.
    Your team is critical, you want the best of the best.
    You manage the property management company they manage the property. To find good ones go to IREM.org The Institute of Real Estate Management search for members from the area of the property. Use Accredited Residential Manager® (ARM®) certified for smaller props 50 units. They have passed a battery of tests to become certified and follow a code of Ethics.
    A great starting point is to link up with a few experienced people who have a deal already go in on the deal for first hand knowledge.
    Paul

    • Stepine Anfield on

      This is so true. I’m fairly new to real estate investing, but have acquired 4 properties in South Carolina while living in Virginia. Having a fantastic property manager makes all the difference.

  11. Hello Tom,

    I hope you had a great harvest this year. I know San Rafael, and I have sold many many containers of Bianchi and Mumm down here in the past
    .
    I researched Miami in 2010 and 2011, but I could not find the returns on less than 10 years old properties that I was finding in Orlando and Atlanta. Now I see that appreciation in Miami has been awesome and would have been great to invest there…Are there still positive rental cashflow opportunites available with so much price growth? Please if you like, let me know about the condo developments. you can reach me at [email protected].

    thank you
    aldo

  12. Paula –

    I think it is a real slippery slope especially if you are new. Heck it’s really hard if you’re experienced. You have to have a great management team in place to succeed. There are some folks that pull it off, but I have never been tempted.

    Sharon

    • I think the real issue is “pro-active”: vs. “reactive”.

      Far too many would be real estate investors succumb to the glib hype by those hawking out of state properties that it is a slam dunk “hands off” (reactive) killer opportunity. Fits of all, if it was a screaming deal the one’s selling the goods would buy the product and then flip it.

      The truth is what is often touted as 8@ – 12% ROE or Cash On cash quickly dwindles to 0% – 4% because of vacancies, repairs etc.

      I understand that one’s area may not be conducive to acquire rentals but what about the neighboring city?

      Also, for the money invested there are many more lucrative short term, 6 – 12 month investments that when turned over a few time s a year have far higher yields.

      • “Also, for the money invested there are many more lucrative short term, 6 – 12 month investments that when turned over a few time s a year have far higher yields.”

        Could you elaborate on what some of these investments are?

        Thanks,

        Andrew

  13. Investing out of state is doable, but you have to due your due dilegence as if you were in your local area. Real estate is now, regional. national, as well as worldwide. No investing in an area outside yours, could be loss of opportunities on good deals. Investor in my local area, in St Louis, Mo. do both. A goo deal, and a good deal is still a good deal, no matter where it is if all the numbers make financial sense.
    JWeaver. St Louis

  14. For a newbie, I’d say absolutely not. There’s just too much that we only learn firsthand by seeing and touching.

    Our company has been buying and selling for 10 years and have gone through hundreds of properties. Everything we have purchased is within 20 minutes of our office. Fortunately, we live in an area that is populated and diverse enough to do this.

    We do, however, buy for a lot of out of state investors whom we then manage the properties for. They are not newbies. They are all successful business people with the cash to back up their investments.

    I do not believe out of state owning is for the inexperienced. The grass IS NOT always greener on the other side!

    🙂

    • Karen,

      Well said.

      Maybe some of us have forgotten but I remember nor so long ago the days when people stood in line to send money to out-of-state Realtors®, Developers, Jack-of-all-trades etc. they had never met for a property they have never seen in a city they have never visited.

      Talk about blind faith.

      I would venture to say that these type of buyers couldn’t tell you anything germane about real estate in the city where the property is they are investing. For example, MLS figures on “Days On Market”,”Current Inventory vs. 30, 60, 180 and 360 days ago”, and “List To Sell” percentages.

      Like it or not most of us are reactive not pro-active and take comfort in letting someone else make our decisions for us.It is so easy to just write a check and wait for the return.

      It may seem like a non-sequitur but with 45,9000,000 IRAs in America collectively worth five trillion dollars, Wall Street dominates 95%. Why don’t more people have Self-Directed IRAs? Because they believe Wall Street’s propaganda that they are not capable of handling their own investments.

      Many of the out-of-state companies that specialize in out-of-state real estate may employ the same glib tactics, e.g. you are not capable of finding and managing real estate in your own area so sit back, relax and let us do it for you.

    • Brett Pedigo on

      What about new investors in areas where ANYTHING is completely out of reach? LA, San Francisco?

      That’s the drawback living in LA. The cost of living is so high, it’s hard to even save a nest egg, let alone 35% for ouse. Most are snached up in cash deals here. My only hope is out of state.

  15. One thing, if I recall correctly, is Texas has a property tax as high as 2+% thus a $136,000 rental property in another state might have a 1% of $1,360 annual property tax, by contrast
    the Texas property tax could be double at 2% and that increases your expenses and eats into your cash flow.

  16. In my opinion, there are good deals and bad deals in every market.

    By choosing to limit myself to my home market, am I excluding potential investments that might have a higher return? absolutely.

    But with my lack of knowledge of other markets, am I likely to find those special market-beating deals? Am I really going to be at the top of some out of town brokers’ list of people to call when he has the inside track on a below market estate deal? Probably not. I’m more likely to get an average market deal, which (even if it is in a better market) is unlikely to make up for an annual trip out there, paying for services that I could do myself, and other similar issues.

    In my experience, market-beating returns comes when you have superior market knowledge. For me, that means limiting the kinds of deals I do even in my own city. Am I passing up some potentially good deals? Yes. But am I also passing up some dogs that I may not realize are dogs because I’m not an expert in that submarket? Yes.

    To me, it is like investing in mutual funds. Do some mutual funds beat the market? Yes. Is there a way to identify in advance which funds will do so? not reliably.

    If you live in the middle of nowhere, you may decide to become an expert in some other market, but the idea of owning a random collection of properties in different cities just because some broker that you met once told you it’s a good deal… that just seems like a good way to lose your shirt.

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