Consider Letting Go Of Self
If you have been a DIY kind of landlord or investor in the past, you may find yourself shuddering at the thought of hiring a team of professionals to complete the tasks you normally tackle. Unfortunately, investing outside of your local area means that you will likely need to let go of self-managing. If you do decide to self-manage, being a long-distance landlord is possible, but only with the right team.
Tips for Long-Distance Landlords:
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Analyze The Real Estate Market For Buying
Property investors know the importance of performing a real estate market analysis before buying investment properties. This is especially important for those thinking of buying a second home for investment out of state! So, spend as much time to research the real estate market as you would when buying a rental property in your market.
Look into specific factors like the strength of the local economy, median property prices, housing market trends, zoning laws, property tax rates, convenience, and amenities, etc. Furthermore, since youâre buying a vacation home rental, investigate tourism trends in the area as well. This is because while renting out a vacation rental on sites like Airbnb can be a great source of rental income, this investment is heavily dependent on tourism.
Whatâs the point of buying a vacation home rental if the area doesnât attract tourists and travelers? To assure that youâre buying a second home for investment in the best location for an Airbnb investment, make sure the housing market has a high Airbnb occupancy rate. This allows you to count on the investment property to generate rental income, positive cash flow, and yield a good return on investment.
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Consider Flipping Investment Properties
This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It’s also more expensive than it used to be, given the current higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.
There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do, says Meyer.
His suggestion: Find an experienced partner. Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project, he says.
The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you dont mind a little dust.
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Build A Local Maintenance Team
Maintenance tasks such as making repairs, landscaping, pest control, and seasonal servicing of a heating and cooling system are generally a landlords responsibility. Thats why its important to have a list of trusted, go-to local service providers to perform routine maintenance and make emergency after-hours repairs.
Asking for recommendations from fellow real estate investors, conducting phone interviews, and speaking with references are some techniques for building a solid local maintenance team.
An investor may wish to consider purchasing a home warranty for a rental property, making sure to read the warranty contract thoroughly to understand whats covered.
How Are You Going To Manage Your Property
Without a real estate agent who can handle your propertys tenancy requirements, repairs and maintenance needs, you may find managing a property in a different state or territory requires more work than managing one closer to home. So investing in a reputable agent up front could save you time and energy later down the track.
Should you choose to enlist an agent, make sure you factor the fees into your budget planning. This will give you a better idea of how the costs stack up when comparing investment properties interstate and locally.
Our Budget Planner can help you with your calculations.
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House Hack Your First Rental Property
As a beginner, a great way to start investing is to house hack. This is a slang term for buying a rental property that you’ll live in at the same time you rent out part of it.
Often this takes the form of buying a duplex. You live in one side and rent out the other side to tenants. Or if you’re single, buy a three- or four-bedroom single-family home and live in one room and rent out the extra bedrooms to friends or peers.
Ideally, house hacking allows you to live rent-free because the rental income from your roommates is sufficient to cover all property costs.
One benefit of house hacking is that you’re onsite to manage the property, so you don’t have to pay for property management when the tenant clogs the toilet. Of course, a downside is that you might not like living in the same duplex as your tenants or sharing the kitchen of your home with roommates in a single-family residence.
How To Decide Where To Move
Choosing a city to move to in Florida is easy when youve narrowed down your preferences. Ask yourself the following questions to begin your search for the perfect Florida city to call home:
- Do you want to be close to the beach?
- Do you prefer a quieter town with fewer tourists?
- Do you want to be close to the theme parks?
- Do you want to be on an island?
- Do you want to be close to big cities?
These questions are great primers to help you think about where you want to live in Florida and what matters most about the location.
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What Are Different Neighborhoods Like
Buying a home doesnt have to mean youll live there forever, but youll want to ensure youre moving to an area you want to stay in for at least five years to avoid capital gains taxes . So try to visualize not just how youll feel walking around your front porch with a cup of coffee, but how youll feel walking around the neighborhood or commuting to work. You arent just moving to a specific home youre jumping into a life somewhere else.
With this in mind, you should really contemplate the neighborhood of a home youre interested in before making an offer. Of course, youll want to do your research on schools and crime rate, but youll also want to know whats around. Try checking out Google Maps or Google Street View. Is the home near a busy intersection, railroad tracks, or a noisy highway? On the flipside, is it close to stores, restaurants, and other places youd frequent? You need to think about concrete things like square footage and less tangible things, like the overall vibe of a place. Both are crucial, and when youre moving somewhere far away from where you currently live, you might not have such a keen awareness of the energy on the ground where youre headed.
Hire A Florida Real Estate Agent
Hiring a reputable Florida Realtor® will help you out immensely when youre buying a house in Florida from out of state. You might be surprised to learn that the real estate laws in Florida vary from those in your current state. Lean on your agents knowledge of the local regulations and their expertise in how to buy a house in Florida. A great real estate agent will look out for your best interest and guide you to properties that meet your prices range and needs.
Your real estate agent will also be the one to schedule showings, draft your sales contract, help with negotiations, and guide you through the entire home buying process. They know of the area and can send you homes for sale soon after they hit the market. Plus, brokerages like McCallion & McCallion go above and beyond to help you with virtual walk-throughs, attend inspections, and assist you on the ground, while you are in another state. Thats why it helps to have a tried-and-true real estate professional to ease the stress of the out-of-state home buying process.
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You Dont Know The Market
The first challenge in purchasing rental properties out of state is that you dont know the local market. In short, you dont know the best neighborhoods . You also dont know the economic trends, how the population has changed , or the local politics that might influence further development. Simply put, unless you are pounding the pavement, you dont have an intimate understanding of the local market.
Timeline For Buying A House Out Of State
Finding a home in another state will require you to invest a bit of your time obviously more than moving across town would do. On the low end, it could take anywhere from three to six weeks, since most lenders need at least that amount of time to approve your mortgage loan. On the high end, the process could take several months.
All told, the process of buying a home can take about four months, and potentially longer if youre moving to an area youre unfamiliar with.
Some other questions to consider when figuring a timeline:
- Will you be selling your current home first? If so, it could sell faster than the time it takes you to find another one, which can complicate your timing.
- Do you need to move quickly? If so, you may have to buy the home sight-unseen.
- Does your new home have to be move-in ready, or do you have the flexibility to do renovations?
- Are you prepared to move tomorrow, or do you need time to sort through your belongings?
- Will there be considerable time spent traveling for your move?
These and other factors can all influence your plan and timing.
One thing is for sure, when moving out of state, you will not have the luxury of spending a lot of time touring properties and going to open houses. This is the reason that getting organized and creating an effective strategy is the first thing you need to do to relocate to a new state.
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Resident Groups On Social Media
If you already know the city youre moving to, request to join the community group through social media platforms such as Facebook or Nextdoor. There, youll be able to read posts from residents about things theyre experiencing as they live in the city.
These groups provide a more personal view of life from actual residents who are a part of the community. Youll be able to find hidden gems from people raving about their experience, uncover common problems many residents face and see how neighborly people within the city act towards each other. You can even post in the group introducing yourself as a new resident, asking questions about the area and getting tips and recommendations from people who know it best.
Drawbacks To Out Of State Rental Property
One of the biggest challenges to buying rental property out of state is committing to taking the time and effort to understand the market. While the potential profits may be greater, theres also a larger learning curve to investing outside of your home market.
Here are a few possible drawbacks to out of state rental property, and how to avoid making a big mistake:
1. Skipping due diligence and buying property sight unseenTo avoid one of the biggest mistakes that out of state rental property investors make, conduct in-depth research online and work with a local investor-savvy real estate agent and property management company to assist with your due diligence and property inspection.
2. Struggling to find quality tenants to rent your property
Long-distance real estate investors are buying rental property for the income it produces. Thats why they focus on turnkey rental houses and small multi-family investments. When the property is already occupied, cash flow from turnkey rental property begins the day escrow closes.
3. Unfamiliar with landlord-tenant rules, local laws, and customs
Some markets have laws that are heavily in favor of the tenant.
While the demand for rental property may be strong in these places, rules and regulations that side with renters can end up limiting ROI and cash flow. Thoroughly research local laws and market customs by talking to property managers and joining local investor groups to learn what the real estate market is really like.
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Compare Costs Of Living
Moving to another state is a much bigger deal than moving within your neighborhood, explains Steven M. John, SCRP, SGMS-T, president and CEO of HomeServices Relocation, based in Minneapolis, Minnesota. Everything changes, and its important to do research to get an idea of how things may be different.
You can begin initial research about your new state online, John says. Family or friends who live in the area can also be a resource for information. Youll want to learn about:
Will You And/or Your Joint Applicant Have Verification Of Employment In Your New City
Most lenders require proof of income based on pay stubs, which is easy enough if youre purchasing a home in a city where youve been working for a while. But moving for a job you havent started yet could throw a wrench in the process. For long-distance moves that include changing jobs, many lenders will allow a contract for employment to suffice for income verification, but make sure to talk to your loan officer in advance. Worst case, you can always rent for a few months while you get a few pay stubs under your belt.
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The Risk Exposure Of The Home
Well keep saying it: Buying a home is always more expensive than the sum of anticipated costs associated with actually procuring the place. Youll also have to deal with expenses like home repairs and insurance, which of course is pretty basic stuff youre likely already planning for. We would just like to mention that a big part of scoping out future costs is thinking about how risky your home is .
While you cant predict unforeseen expenses, you can get an idea of how much insurance will cost by understanding a homes risk to catastrophic events, John Bodrozic, co-founder of Home Zada told us. For instance, coastal properties in the south will be more susceptible to hurricanes, while a home in the midwest has more risk for flooding and tornadoes, all of which could drastically affect your home repair and insurance budget.
Before You Purchase Property
Before purchasing an investment property in Florida, always visit the property in person or have a real estate agent you trust to view the property. Its highly advised that, if you can, you tour the place in person to ensure youre making a wise investment. The last thing you want is to buy a property that will cost you more than you expect with hefty repairs. Make sure you hire a qualified company for an inspection and have the property appraised. The inspection report will let you know if the property needs any extensive repairs, and the appraisal will tell you if the property is worth the listing price.
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Financing Details May Differ
Here, the issue is more that you’re buying a second home as an investment, rather than that you’re buying outside of New York state.
“When you’re buying a second home for your own use, the banks will allow you to take advantage of primary residence rates,” says Watanasuparp. “But if you’re buying and planning to rent it out, they consider it an investment property, making the rates a little higherusually be a quarter to three-quarters of a percent. You also might have to put a little bit larger of a down payment down, maybe 25 percent to 30 percent depending on the bank.”
And in the event you’re tempted to take a shortcut, “don’t lie to the bank and say it’s a second home, then rent it out, anyway,” warns Feeney. “That’s fraud.”
Also to keep in mind for first-time investors: If you can’t afford the property without factoring in your projected rental income , banks will require that you have a prior track record as a successful landlord.
“You would have to have two years of rental history if you can’t get financing without the rental income,” says Watanasuparp. “They want to make sure you understand the responsibilities involved.” Most banks will also only factor in 75 percent of your projected income, in order to play it safe. “So if the rent is $1,000 per month, the banks will only use $750.” This is a good rule of thumb for you to use in your own financial calculations, as wellmore on that below.
Affordability And Cash Flow
In order to enjoy the dual benefit of an affordable rental property that simultaneously generates a positive cash flow, you need to first understand two critical markets factors.
An affordable market is one where the average home price is no more than three or four times the average income. In this type of market, you can find great cash flow where the average home price is only double the average income. However, in non-affordable markets there is little cash flow and the average home prices are often 10 times more than the average income. New York City, San Francisco, and Los Angeles are three examples of non-affordable markets where cash flow is low and the investment is high risk. Being able to move away from high risk areas by investing in affordable markets that break the 30 Minute Rule can lead to opportunities for higher cash flow.
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