As the economy has picked up in recent years, many commercial real estate investors have found themselves priced out of their local markets. Instead, they’re looking to alternative markets where real estate investments require less upfront capital while still generating strong returns.
Owning real estate in distant markets isn’t for the faint of heart. Some real estate investors buy and self-manage property from afar. It’s not easy, but it’s possible.
Before you take the leap, consider some of the pros and cons of investing in long-distance real estate.
Pros of Buying Long-Distance Real Estate
* 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 lower 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.
* It can be a good strategy for those considering a move down the line. Some investors decide to buy real estate in an area that they don’t currently live but think they might want to someday. For instance, you might consider buying a home closer to your relatives if you think there’s a chance you’ll want to live closer to them someday. 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 down the road.
* Real estate, regardless of location, has tremendous tax advantages. The ability to write off interest paid on a mortgage and depreciation makes buying investment property highly attractive.
Cons of Buying Long-Distance Real Estate
* Less familiarity with the market. You may know the ins and outs of the market where you currently live – state and local tax regulations, rental regulations, rent trends and more. Investing in a distant market requires extensive research and candidly, is 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. You may have a robust network of service providers in your local market, including a mortgage broker, home inspector, insurance agent, contractors, etcetera. When buying long-distance real estate, you’re often required to build that network from scratch. This can take some trial and error before finding trusted professionals.
* 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 repairs are needed. However, most professional real estate investors know that the most reliable way to manage the 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.
The decision to buy long-distance real estate isn’t an easy one. However, if that’s a route you decide to go, here are some things to keep in mind:
* Don’t jump into a new market blindly. Do your research early on and study the market comps. You’ll want to be sure you aren’t overpaying for the property, and the rents the seller is getting now can be supported over time.
* Get a firm grasp on the condition of the property. The inspection will help you understand the actual state of the property and shed light on what types of repairs might be needed. Buying a fixer-upper in an unfamiliar market could pose problems if you don’t have an extensive network of service providers.
* Find great renters. Anyone who owns long-distance real estate knows that good residents are worth their weight in gold. 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 are all sorts of property management software out there that make it easier for landlords to collect rent remotely, to manage maintenance requests, renew leases, etcetera. Find the software that meets your needs.
* Schedule routine maintenance. If you own a long-distance rental property, you’ll want to find someone in the area who can mow the lawn, trim the hedges, replace your HVAC filters, plow snow, etcetera. This could be a friend, family member or trusty handyman, but we’d typically recommend you…
* 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 your long-distance rental property every year or so. Even with a top-notch property manager, another set of eyes never hurts.
Supervising rental property from a distance can be difficult, but it’s doable. Moreover, it typically gets easier with time, mainly if you buy multiple properties in the same long-distance market. As long as you’re prepared for emergencies, long-range real estate can be an excellent addition to your investment portfolio.