What Out of State Property Owners Should Know Before Renting Out a Home
Go Back To Previous PageInvesting in rental property outside your own state can be very profitable. There are several markets around the country with lower entry prices and higher returns on rental properties. The key to unlocking return on investment and a good rental property is to understand the complexities involved in owning a rental property outside of your own local state and to know what to do before you bring in a tenant.
The Real Challenges of Remote Ownership
Managing a property from a long distance often involves many layers of operation. Even simple maintenance work can require extensive coordination across multiple locations. In case of a maintenance emergency, work will not stop until you arrive at the location.
There is no emergency that occurs during business hours, when you are available to handle the problem, and can travel to the location to handle the repair. By the time you arrive, the emergency will have resolved itself.
Other problems can’t be inspected by looking at a computer screen. In-person visual inspections must be conducted. Lease violations also need to be addressed promptly. If a lease violation has occurred, work cannot be done from a remote location. The work must be done in person and in a timely manner to resolve the problem as effectively as possible.
Another problem the out-of-state landlord faces is the varying landlord-tenant laws of the state and municipality where the rental property is located. What is legal in one state may be against the law in another. Laws regarding security deposits, notices, evictions, and minimum requirements for a rental property’s habitability can vary dramatically from state to state and from city to city. For a listing of and information regarding the federal fair housing laws, go to the U.S. Department of Housing and Urban Development website. Local compliance is the landlord’s responsibility.
Tenant Screening from Afar
A rental home property owner’s first line of defense against problems with a renter or in a home is a thorough Tenant Screening process. These processes can be done from long distances, so don’t think you’ll have to commute just to do these. A complete Tenant Screening consists of: credit history, background and criminal records, past evictions, employment and income verification, and landlord reference checks.
- Credit history review
- Background and criminal record check
- Eviction history search
- Verification of employment and income
- Landlord reference checks
The Consumer Financial Protection Bureau provides information about how credit reports and credit scores work and how you can use them responsibly when screening tenants for rental properties.
Another challenge of reviewing applicants remotely is determining whether they are honest and truthful during your conversation with them. Since you are not physically present at the home during the interview, applicants can easily distort the truth to get what they want. One of the best ways to improve your chances of finding a more qualified applicant is to require a video walkthrough or virtual showing of the home before you sign a lease.
This will give you a better view of the home and help you determine whether the applicant is distorting the truth about the property’s condition.
Maintenance Coordination and Vendor Relationships
The owner of a rental property located outside of a local area cannot fix a leaky plumbing faucet, paint a rental unit, or respond to an after-hours emergency without calling in a licensed contractor. They should establish a written agreement with a few high-quality licensed local contractors before an unexpected repair is needed. There are many services an owner can hire to include in their lease agreements to handle this type of work.
Identify and vet licensed contractors for the most common repair categories:
- HVAC service and replacement
- Plumbing
- Electrical work
- Landscaping and exterior upkeep
- Appliance repair
Establishing written agreements and preferred rates with licensed contractors in advance of a potential emergency is crucial to ensuring the lowest possible repair costs and prompt response time.
A property management company has local knowledge of a multitude of contractors already providing quality work for their other properties and can likely arrange service before an owner living hundreds or thousands of miles away can even make a phone call to arrange repairs.
Why Local Professional Management Makes a Difference
The self-management of investment properties from a distance is possible, but requires the property owner to have a highly organized management system in place. It also requires the owner to have current local knowledge regarding laws, changes to such laws, and available management solutions. It also requires the owner to be available 24/7 to promptly handle any problems that may arise. In many cases, this is not realistic for investors who are holding multiple properties and are located on the opposite side of the country or even the world.
At the local level, the professional property manager can inspect the leased-up property and assess whether the tenant is leaving on schedule. Most professional property management companies, such as Coastal Realty Services, also negotiate repair costs with service providers on behalf of their landlord clients and provide timely responses to maintenance emergencies in order to minimize their impact on rental income.
The National Association of Realtors reports that owners of investment real estate are very satisfied with their investments when they have an adequate management system in place to handle the day-to-day activities of rental properties. As an out-of-state real estate investor, you may find it difficult to establish and maintain an adequate management system for your rental properties.
Rent Collection and Vacancy Management
The ability to collect rent in a timely fashion is critical to the success of a rental property. It is important to establish clear terms and conditions for the tenancy in the lease agreement, provide a means for tenants to pay rent online, and take necessary action when a tenant is delinquent on their payments.
As an out-of-state landlord, the investor will not be able to physically drive by the rental property to check the exterior and ensure the best curb appeal and attract the best potential tenant. The owner will not be able to be present at the rental property in order to meet and greet potential tenants. The investor will not be able to travel to the rental property to complete light maintenance and work to turn over the property as quickly as possible between tenants. These are all factors an out-of-state landlord must consider when calculating the cash flow the rental property will generate, and most experts recommend building in a vacancy factor of at least 1 month per year.
Inspections and Long-Term Property Protection
Inspections: These will help catch problems before they become major repair issues and serve as documentation of move-in and move-out conditions for retrieving security deposits. An owner can do these as frequently as they like, but it is generally recommended to complete a move-in inspection with photographs (to date stamp) and then a mid-lease inspection around the 6-month point and a move-out inspection at the end of the lease with photographs again (to compare to move-in photos) and lots of notes documenting every aspect of the property.
- A move-in inspection with timestamped photos
- A mid-lease inspection at the six or twelve-month mark
- A move-out inspection with comparative documentation
Without these records, resolving damage disputes becomes difficult and costly.
The Bottom Line
So, many real estate investors find that the most viable way to manage their investments from out of state is to establish adequate real estate investment infrastructure before they actually rent out the property.
Some of the critical elements of a solid infrastructure for a real estate investor are:
1) tenant screening processes;
2) relationships with reputable local vendors such as a handyman, HVAC service and repair, an electrician, and a plumbing contractor;
3) an adequate rent collection process, such as the ability to have tenants make payments online;
4) a system of regular property inspections (e.g., pre-move-in and at the end of each lease); and
5) a contingency fund set aside in anticipation of adequate time to rent out a property following the vacancy of a prior tenant.
We have written previously about ways to select a property management company. However, for many property owners, the real cost of managing a property can be greatly reduced by hiring a local property management company to handle the vast majority of the work related to their rental property.
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
