Experts Explain the Real Costs of Owning Real Estate Out of State
Buying rental property is a great way to derive passive income, whether you rent it out yourself or via platforms such as Airbnb or Vrbo. Buying such a property in another state might present great benefits, as you can pick a location with advantages that may include booming tourism or great job growth.
Yet, there are also numerous costs that can be associated with this endeavor, and if not taken into consideration at the onset, these costs might end up eating into your profits.
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“Taking care of property costs is paramount when it comes to making money in real estate,” said Joe Camberato, CEO of National Business Capital. “One key aspect is diligently managing repair and maintenance costs. Often, it’s best to leave these issues to professionals instead of trying to take these tasks on by yourself.”
Here are other costs associated with owning out-of-state real estate, according to experts.
Property Management
This is a huge financial factor to consider. The need for property management is really what can make the cost of owning property out of state higher than owning in state, where you can do your own management, according to Jason Sorens, Ph.D., senior research fellow at American Institute for Economic Research.
“But some landlords prefer to use property management in any case, because it is more convenient, and because they do not want their tenants to know the identity of the owner,” he added.
Seamus Nally, CEO at TurboTenant, echoed the sentiment, noting that property managers are usually a great investment. He said they are not only often necessary, but they are extremely helpful for property owners as they help things run smoothly.
“But, they are, after all, an investment, so you need to financially plan for the cost of employing a property manager,” added Nally.
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Upkeep and Repairs
If you own an investment property out of state, you are not going to be able to handle the daily or frequent upkeep tasks or tenant inquiries that require a physical presence. That said, Camberato suggested you find reputable, reliable local contractors for tasks such as heating or plumbing issues.
“And if you’re managing properties from far away, be sure to line up these professionals before you leave town. In this day and age, you can use video calls and photo sharing to minimize any potential problems,” he added.
Specialty Insurance
Another potential cost of owning out-of-state property is having to purchase specialty insurance depending on the extreme weather it may be at a higher risk of enduring.
“For example, say you normally live in Colorado, but you have an investment property in Florida,” said Nally. “Chances are, you may need to pay for hurricane insurance for your Florida property, which is something you’d never need to have in Colorado.”
Taxes
Another factor to consider is that property taxes vary from state to state. “If you are from a state with relatively low property taxes and invest in another with higher ones, the difference can be quite stark,” said Nyx Sherwin, CEO and owner of We Buy 502.
Sherwin added that in addition to annual taxes, some states have a rental income tax that directly affects your return on investment.
Marketing
Vacancies can be quite costly due to the lack of rental income during some periods. To avoid this, you may really have to up your marketing for your rental — which comes at a cost.
“Thus, it’s crucial to effectively market your property in order to reduce vacancies. Depending on the region, the cost of advertisement and promotional activities can put a significant dent in your profits,” said Sherwin.
Tips To Reduce Costs
The costs of managing out-of-state rentals can be drastically reduced by using property management software and mobile apps that allow investors or landlords to easily manage their properties from anywhere, said Ryan Barone, co-founder and CEO of RentRedi.
He added that it’s not just about reducing costs, it’s about simplifying processes and making it easier to manage your own properties without having to pay out-of-state specialists like property managers.
He recommended looking for all-in-one apps that automate basic tasks such as rent collection, lease signing, tenant screening, and MLS listings. These apps can also offer more advanced features such as handling 24/7 maintenance requests, providing on-time rent reporting to major credit bureaus to help tenants boost their credit scores, income and asset verification to prevent fraud and find tenants who are a better fit pay rent, accounting services to organize finances and make tax filing easier, and insurance for both landlords and renters.
“Having all of these capabilities in the same property management app allows investors to put their rentals on autopilot, making it easy to manage them from anywhere using a laptop or mobile phone,” he said.
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This article originally appeared on GOBankingRates.com: Experts Explain the Real Costs of Owning Real Estate Out of State
