The Downsides to Owning Out of State Rental Properties (And How to Deal With Them)

downsides to investing in out of state rental propertiesThere are downsides to owning out of state rental properties. Some of them can be combated with careful planning and extra ongoing efforts, while others are simply unavoidable.

None of my rental properties are even remotely close to where I live. (In fact, the closest property I own is 1,463 miles away – just a cool 23 hour drive from my house!) Distance alone presents some challenges, but there are many others I’ve come to learn about.

Here’s what I’m talking about…

 

Can’t Do Repairs Yourself:

Last week, my property manager called about some damage to one of my properties in Texas.

Apparently there was a big storm that knocked down a bunch of trees, which damaged a fence, swing gate, and bent the gutter/roof of the house. (Luckily, no person or tenant belongings were harmed.)

My PM already gathered quotes from contractors to fix everything, and the initial cost estimate is somewhere between $800-$1200. At first this didn’t really bother me, because storms are outside of my control. But then I started to look at the photos of the damage. Check them out below.

The mess doesn’t actually look that bad! In fact, I could probably fix this all up myself easily within one or two days. The problem is, I live in California and can’t just drive over to Texas to do it. I have to fork out $1000 to contractors even though fixing myself would cost much less.

Many other “DIY” projects I’ve had to hire local contractors for. (Eg. easy toilet fixes, simple paint jobs, trash removal). I’ve just come to accept it as a part of being a remote landlord. Going forward as I buy more properties, I heavily inflate the estimated maintenance budget when analyzing new deals. My purchase criteria for out of state rental properties has become much stricter.

 

Keeping Up With State and Local Laws:

Another downside of out-of-state rental properties is local city, county, and state laws can change over time without you knowing about them. If you own properties in 5 different states, you have to keep up with the local politics in each individual area.

There are a couple of ways I stay informed with local happenings in the areas that I invest in.

  • I’ve joined a local real estate meet-up group for the county I own property in. They send out a monthly newsletter and recap of their meetings including related town news.
  • I set up a keyword alert on bigger pockets so I get notified when people are talking about my area in online forums. Here I can read al3l news, questions/answers, and comments shared by other local investors.
  • I call and chat with my property manager pretty regularly. I always ask what trends she sees and any upcoming changes I should know about.

Small political changes can have huge effects on the profitability of your investments. Major employers moving in or out, new freeways or developments getting approved, city laws regarding taxes, etc.. You need to stay on top of it all!

 

Multiple State Tax Filings:

This is more of a pet peeve than a major downside. Depending on which states you invest in and your ownership structure, you may have to file multiple state tax returns each year. As a general rule of thumb, you have to file a return with each state in which you earn rental income.

I used to be a fan of TurboTax and filed my own returns each year. But as my rental property business grew, I quickly switched to working with a tax professional. My tax guy does most of the heavy lifting, but it’s still a big pain in the ass to file every year.

 

Building Trust Remotely:

It’s hard to build a trustworthy real estate team – especially when doing it all over the phone! There can be huge differences in culture, religion, education and business ethics between the city you live and the city you invest in.

All of the properties I own today were purchased sight-unseen. I rely tremendously on the local individuals I’ve built trust with over the phone.

One book that helped me a lot is The Speed of Trust by Stephen Covey. This changed the way that I think about building relationships and how I can find common ground quicker with the people I work with. If you’re considering buying some out of state rental properties and are worried about trusting the locals, read this book!  (Now that I think about it, another great book I recommend is Long-Distance Real Estate Investing by David Greene. This guy is an absolute beast and he co-hosts the BP podcast)

 

It Gets Easier Over Time…

If you want rainbows you have to put up with the rain. Regardless of all these downsides to owning out of state rental properties, I still believe the pros outweigh the cons.

 

Happy Investing!

 

4 thoughts on “The Downsides to Owning Out of State Rental Properties (And How to Deal With Them)

  • I’m amazed you can handle multiple properties in different states! I moved to FL leaving my rentals in NC with a management company. Going from DIY to hiring out the repairs got really expensive fast. The hardest fee to pay was $50-$100 for trash removal (items left behind by vacating tenants.)

  • Nice post – Real estate isn’t all cupcakes and roses (and our house got whacked by a TX storm about three weeks ago).

    I still procrastinate on doing this, I think I’m going to stick to a half day’s driving distance on an property for this reason

    • Yeah, that’s a good rule. I’m in LA and have friends that chose Vegas for this reason. They only need to drive 4 hours to do any DIY repairs, and they get to gamble away any positive cashflow when they visit too! Win/win?

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