Key Steps to Long Distance Rental Investing, Part 2: US Citizens Living Out-of-State
Wondering how you can do long distance rental investing in the US while living in another state?
There are plenty of reasons why you might want to invest remotely in the U.S. market:
1. There are better real estate investment opportunities outside of your state or current country of residence.
2. Home prices are too high in your local area
3. There’s not enough rental demand in your local area
Whatever the reason, it’s possible to invest in the U.S. real estate market from out-of-state.
Let’s go through the process of how you should go about purchasing a rental investment property from afar:
Building your Tripod Team
Wherever you choose to invest, do so strategically.
Ultimately, your Tripod Team is the most important thing to have as an out-of-state rental investor, because without a strong local team, you’ll run the risk of getting sold a crap property. And even if you find a great property, without the right management, some tenant will ruin it for you. So make forming a strong team your first priority
You can find reputable local property managers, Realtors and inspectors through your local REIA (or by asking for recommendations on BiggerPockets!). Just make sure you screen them thoroughly, and ideally speak to landlords who have dealt with them in the past.
The other option is to go through a turnkey provider (a company which sells rentals already “fully refurbished” and tenanted to low-maintenance investors). However, turnkey investments aren’t actually always as low-maintenance as they claim to be. They can come along with a host of problems, especially if you don’t screen the provider and the investment opportunity very carefully.
Ownership Structure
The first thing you have to decide when purchasing investment properties out-of-state is whether to do so as a private individual or an LLC.
If you do decide to go the LLC route (which many investors do, to limit their personal liability), then the next question is: do you set up the LLC in your home state, or the state in which you’re buying property?
Some property investors like the idea of registering their business in Delaware, Wyoming or other states to take advantage of potential tax & other benefits, but unfortunately this plan doesn’t always work, depending on the state where you’re buying.
In Michigan, for example, even if you have an LLC registered in another state, you still need to register it again in Michigan in order to buy property here. So, in the end, you wind up paying company registration fees twice over, and don’t get the tax breaks, either. Youwould have been better off just setting up one LLC in the state where you’re investing.
Just check the local laws regarding LLC registration in whichever states you plan to purchase property, before you go out and pay the fees for setting up a local company.
Managing Remotely
Lastly, long distance rental investing is never a 100% passive investment. Unless you’re going through an REIT or similar investment vehicle, you still have to manage the property manager, at the very least.
Expect to spend 2-4 hours a month managing the manager, although this will vary based on the property class. This will increase a bit as you add properties, but economies of scale kick in, so the number of hours won’t increase linearly. .
But how do you do this remotely?
Make sure you work with a property management company that has online reporting in place. For example, we have an online landlord portal, where property owners can view everything from monthly financial reports and maintenance bids to property photos, videos and lease documents.
Just be careful, because we’ve heard of PMCs with portals who never use them or upload any documents to them – so just the fact that a property management company says they provide digital records, doesn’t mean they actually use that system. For that reason, we give potential clients access to a test portal where they can see the live reports we provide and samples of the type of statements & documents we make available.
We also think property, tenant and maintenance videos are a MUST. Every business professional has a phone with video capability these days, so there’s no excuse not to supply owners with videos to show the condition of a property, document tenant complaints, show why repairs are needed and that they were completed.
Your best bet? Make sure the management contract gives you the option to terminate with no additional fees within the first 90 or so days, so if your PMC isn’t up to scratch, you can find another relatively easily.
With technology making everything within arm’s reach, it’s easier than ever before you commit to long distance rental investing.
If you’ll be investing in the Metro Detroit area, we have a whole series (hyperlink) that guides you through different neighborhoods and cities in the area, so you can get a better sense of which area you’d like to target.
Are you a non-U.S. citizen who wants to invest in the American rental market? In our final part of the series, we’ll be looking at how to buy investment properties without a U.S. passport, so check back next week for our foreign investing tips.
Any experiences with investing in rental properties out-of-state? Share your tips below.
Image by Palo Cech