I do so love to tackle “big debate” topics! I know this one — whether you should invest in rental properties locally to where you live or if it’s okay to invest non-locally — definitely hits a lot of hot spots on the BiggerPockets Forums, so I figure, let’s bring the wrestling match over to the blog!
As you will always hear me say, regardless of the rights or wrongs of any one particular method of investing, the only thing that matters when it comes to deciding what method of investing you choose is your comfort level. There is no method of real estate investing, no matter how good or profitable it may be, that is worth you losing sleep at night.
On the flip side (such a great pun considering the industry!), if you are happy as a duck and sleeping like an angel because you feel so good about your investing methods that you don’t have a stress in the world, I will never contend with that! You could be losing money with the investing you are doing, but if it is what makes you happy and keeps you at minimal stress levels, then I will still support you. I think this is such a big message that gets lost in the chaos: REI should be enjoyable! There will always be stress and mistakes and lessons learned, but at the end of the day, there is no reason you shouldn’t be enjoying what you do.
Now, a critical piece of this puzzle — figuring out what you enjoy and what keeps you sleeping at night — is education. I stand strong in the belief that you can’t truly know what won’t stress you out if you don’t have at least some education around it. That education is what I’m hoping to provide you with in regard to whether investing in rental properties locally or non-locally is for you.
Why You May Not Want to Invest in Rental Properties Locally
Here is a list of logistical reasons that may have you looking outside of your local area for rental properties or at least considering the option.
The most basic aspect of whether you want to buy in your local market is whether or not you have enough capital to buy there. There are a lot of markets out there that are freakishly expensive, and you may not have that kind of capital.
Forms of Profit
Assuming your goal with buying a rental property is profit, different forms of profit may not exist in your local area. Typically with a rental property, the two most common strategies for earning income are:
- Monthly Cash Flow: Where you receive income each month from the rental income, after all expenses are paid.
- Appreciation: Typically houses increase in value, and that value is the appreciation; also known as equity.
There are many ways of profiting from a rental property, but typically going into shopping for a rental property, your goal is going to probably be either monthly cash flow or appreciation. For example, Midwestern markets are known to produce monthly cash flow but be pretty minimal on the appreciation front. San Francisco and Los Angeles, on the other hand, aren’t known for monthly cash flow at all but are very well known for appreciation. Other markets may be some combination of the two. So depending on what you are after in terms of cashing in, your local market may or may not be the place to invest.
If you want to know more about monthly cash flow and how to calculate whether or not a property is expected to see positive cash flow or not, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”
Maybe the market you live in is a declining market or maybe where you live just isn’t somewhere you are all that interested in investing in. Or maybe you plan to move somewhere else later on, so you want to start investing there now. Or maybe you’ve bought plenty of properties where you are and now you are interested in trying your hand elsewhere, or you want to diversify your portfolio to include several markets/locations for risk mitigation purposes. Whatever the reason, you may just not be feeling your own market, and that’s totally fine. Or maybe even you just want to be a total rebel and try for cool points by telling people you own property in some other city (I’d give you cool points).
The Downsides of Investing in Rental Properties Outside of Your Local Area
I would say there two downsides to investing in rental properties outside of your local area. If I were to be more accurate though, I would say there are really only 1.5 downsides of investing in rental properties outside of your local area. Why the half? Because one of these is a huge issue for some people and a total non-issue for others (me). I’m still going to list both, though.
Downside #1: You need to hire property management.
Property management can be a big pain in the you-know-what for anyone investing outside of their local area. The exception to this, of course, is if you are a long-distance landlord and not using a property manager for your rental property (which poses its own set of stresses). Property management is, to me, considered a major downside because of how hard it is to find a good manager. And the downside to not finding a good one? A bad property manager can cost you a fortune!
What is so bad about property management, anyway?
Property managers don’t make a big margin of profit per property, so the trade doesn’t always attract the highest quality individuals/companies out there. Not to say there aren’t good ones, but the really good folks out there are probably going to want a higher income for doing any kind of job. There is definitely an art in figuring out how to really profit by being a property manager, and it is doable, but the general income model is a little tough to work sometimes in terms of who it attracts.
For some reason communication has never really seemed to be much of a strong suit of property managers, whether it be because the manager isn’t good at communicating or because the company’s organization for handling calls and questions is done in some kind of complicated or confusing way. I have only liked individual property managers (versus property management companies) for this exact reason. Nothing feels worse than not being able to get questions about your property answered, not being able to get ahold of your manager easily (or at all), having income statements you don’t understand, or getting unexpected repair charges you can’t seem to get to the bottom of.
If you are relying on your property manager to keep your property in good shape, there is a level of trust that is required for that. The reality is, your manager can tell you all day long that your property is doing great, looks great, repairs have gone well, and your tenants are taking good care of the property — and yet all of that could be total lies. Eek! How would you know otherwise?
Downside #2: Not being able to get to your property quickly.
Here’s the “half” one. Personally, this issue doesn’t bother me a bit, and quite frankly, I actually prefer not being able to drive by my properties. I know myself — if I were able to drive by my properties, if I so much as saw a scuff on the garage door, I would stress out immediately. The reality is that a scuff really doesn’t matter, but I’d stress and go all control freak on my manager (which I assume I would have because regardless of location, I still don’t want to be a landlord). Or if I didn’t have a manager, I don’t have a clue about how to get a scuff off a garage door, so ick! All the while, a scuff doesn’t matter.
But that’s just me.
I totally get why being able to get to your property quickly or easily is desired by most. It’s to make sure your property is staying in tact! Regardless of whether you are the landlord or you are using a property manager, how else would you confirm everything is going okay if you can’t see the property? Now, a lot of this changes too if you are handy or skilled at being a landlord or dealing with properties yourself. If that’s the case, I can see even more reason to buy locally — so you don’t have to pay other people to do work that you can do. I am not one of those people, so even if I had a property near me, I wouldn’t have the foggiest about how to deal with it anyway (or the interest).
But again, I get it. Not being able to get to your property, for whatever reason, is considered a huge downside for many.
Mitigations for the Downsides
Good news! Both downsides can be mitigated with and dealt with. If you want them to be.
Mitigation: Property management.
Find a good property manager! Duh. Well, then it gets harder because good ones can be hard to find. Some suggestions? First, ask current investors who they use. Ask in the BiggerPockets Forums, ask at real estate club meetings, ask everywhere. Referrals are one of the best ways to find someone you like. If you can’t find anyone who is using a property manager in the particular area that your property is located, don’t worry. That’s what Yelp and Google are for. Write down all the companies you can find and give them all a call.
You can also call up local real estate agents and see if they recommend anyone. Interview a lot of potential managers. Just by interviewing a lot of them, even if you don’t have a clue of what you should be asking, you should be able to narrow down your list to the property managers who at least sound half worth their salt. You’ll be able to tell, I promise. And don’t get discouraged if you don’t find someone who sounds good right away. It took me a whole year to find my first good one! Believe me, they are out there, so just keep looking.
Worst case scenario, you hire a not-so-good property manager. The world will not end, I promise. Solution? Fire them and hire a new one! Easy as that. Don’t buy into that crap that managers might try to tell you—that you have to sign a contract saying you will use them for a certain amount of time. No way! Property managers work for you. If they are horrible, they should be fired. That would be like you owning a company and your employee telling you that you have to keep them for a certain amount of time. No. You are the boss of your property, so remember that. Bad manager? Fire them. And do it quickly, too. Don’t wait around hoping they will get better. You (and your wallet) are the only one who will suffer for that. Trust me, I learned that the very hard way myself, and it cost me a lot of money.
Extra bonus? You can hire and fire property managers over the phone! I did. I’ve never once been local to my properties to deal with any of that.
Good managers are out there, it may take some trial and error to find them, but trust that they exist.