Another Real Estate Question: Buy & Rent a Condo From Afar?
October 17, 2014 3:27 PM   Subscribe

If I wanted to buy a house or condo in a distant state as an investment, and I had an opportunity to buy a place outright, with tenants and leases already in place, should I? How about outright but sans tenants? More info within.

Let's say I had enough money to buy a place outright, or with a very low monthly payment. In the city where I'm looking, my calculations indicate that the rent I could collect on the place is $750-$1000 a month greater than what my monthly expenses on it would be (mortgage if any, real estate tax, condo fees, insurance, utilities I need to pay for tenants).

Let's say that I eventually want to buy a house of my own, and would be able to retain enough cash (and borrowing power) to be able to put a down payment on a place for myself in a couple of years—so this investment wouldn't sink my chances of having my own place in the not too distant future.

I've wanted to invest in real estate for a long time. I have money that's parked in the stock market now, but I'd really like to put it to work in a way that would reap me a monthly income. I work in a creative field that doesn't pay well, so extra cash coming in each month would be a big help.

While I recognize that it's much easier to be a landlord in the place where you actually live, I can't afford to buy in the very expensive city where I'm living now, and I may or may not be living in a place where I can & want to buy any time soon. But I *can* afford a decent small place in a city near the one where I grew up. I've toured the city with a real estate agent, and my impression is that there's plenty of inventory in my price range. The city's economy is healthy and growing, so I'm not too concerned about an ability to find tenants.

And I'm looking at a few particular places. One is a small building with one commercial space and one small apartment, both rented through mid-2015. I'm also looking at (empty) condos, because they're relatively inexpensive, and because I thought that the lack of exterior maintenance duties might make things easier for an absentee landlord.

I'm familiar with the debates over whether or not to hire a property management agency. My thought is that I would try to get away with not doing so, and would look into one if I found I was in over my head. I know that a property management agency would reduce, but not obliterate, my proceeds from renting. I also know that I'll spend something on maintaining the place and fixing anything that goes wrong—and that seems like a pretty big x factor. Is there some formula or rule of thumb for estimating maintenance costs?

Any thoughts, experiences? For me this is sort of the dream that won't die.
posted by toomuchkatherine to Home & Garden (15 answers total) 6 users marked this as a favorite
"...$750-$1000 a month greater than what my monthly expenses on it would be..."

So let's say the monthly rent on this place is ten grand. If I had an investment that'd get me 7.5% to 10% per month, why would I sell it?

I strongly suspect that you're underestimating the "mortgage if any, real estate tax, condo fees, insurance, utilities I need to pay for tenants", or you're underestimating the opportunity cost of parking the money in this investment (ie: you paid 90% down).
posted by straw at 3:32 PM on October 17, 2014 [2 favorites]

Response by poster: I think I'm estimating both correctly. I know there's a large opportunity cost involved in plonking down like $150k on a condo instead of leaving that money in mutual funds or whatever. But, as I said, netting some monthly rental income would really help me a lot, as it would reduce the amount of time I need to spend in 'work I do to pay the bills' time and increase the amount of 'time I get to work on my creative thing' time. That's what makes the opportunity cost worth it to me. I also think there'd be at least a little bit of capital appreciation over time on the building or condo itself.
Is there something wrong with my logic?
posted by toomuchkatherine at 3:37 PM on October 17, 2014

It doesn't seem to me like you think of being a landlord as a part-time job in and of itself. It's not just money spent fixing things, it's time spent facilitating these fixes, which often has to happen in person. For example, my renting neighbors were just evicted, $6000 behind on their rent, and the place is trashed. The owner has been down a few days a week for the past 3 weeks (plus weekends) getting the place back into rental shape. This kind of work can't really be handed off to a contractor, entrusting them to do it the way you'd like, unless you already know a very good contractor.
posted by muddgirl at 3:57 PM on October 17, 2014 [3 favorites]

What ISN'T wrong with your logic. It sounds good in theory, but there are variables. SCARY variables.

What about condo assessments? That's when the board decides to paint the entire building, or replace the boiler, say good bye to $7,000. What about when you have to update the unit? What if it sits un-rented for longer than two or three months? What's a management company going to cost? Your tenants can't call you if the toilet needs snaked. What if you have to replace the A/C unit, the fridge, the stove, or any other thing in the place?

Another thing you need to know about condos is that you need permission from the board to rent them out. So if your current tenants move out, it's entirely possible that any prospective tenants might have to go through an approval process. Good times. FYI, some condos limit the number of units that can be rentals, my building was 25%. That can be a FUN game of musical chairs.

Can you afford to have tenants not pay rent, and force you to evict them? That happens. Also, what if they trash your place?

Let's also think about mortgages. You know those FHA awesome rate mortgages? They don't count for you. If it's an investment, you pay a higher rate., it's different if you're an investor. And taxes, you will need to have an accountant prepare them for you. We paid $900 per year for that.

Condo's don't appreciate all that much. They typically lag the market and in a downturn, they are damn near impossible to sell, let alone for a profit.

So...I'd say save your money.
posted by Ruthless Bunny at 4:08 PM on October 17, 2014 [1 favorite]

I can't imagine owning a rental property and not living close by and not hiring a property management company. I mean, a property management company is still not ideal, it's not their investment so they won't care about the property the way you do, but there's a lot of work involved that maybe you don't realize.

This year alone, we have had to replace the dishwasher, garbage disposal, and furnace (during a blizzard, it was freezing, we had to get it done THAT DAY, it was a huge headache). Once we spent an entire day dealing with a massive kitchen sink clog. We didn't lose money on the property this year, but we did everything but the furnace ourselves. Hiring contractors to do the work really cuts into your bottom line.

At least annually you should do a pretty thorough visual inspection to make sure no problems are cropping up that your tenants haven't noticed (not noticing things like leaks that can cause major problems down the road is super-common). This year that inspection resulted in needing to pressure-wash the roof, redo the gutters, and cut back some trees that were going to start causing problems soon. We probably also need to do some re-grading around the garage or we will have problems with the concrete floor in there.

I have dream tenants (a low-maintenance family with two kids who want to stay there long term) but they are slow payers, so there's a lot of back and forth. Having tenants that cause problems will send the amount of work you have to do into the stratosphere. And between tenants there is turnover, which can be as simple as cleaning or as complicated as replacing floors and walls and cabinetry and countertops.

It's really a lot of work, and not a lot of profit. Yeah, you've got an investment, and it might appreciate (or not) but one big ticket expense can really eat into your profits (I dread having to replace the roof!), and if you value your time at all there's a huge cost in not having that time to do other things.

And we live locally so there's not even travel costs involved! Not being local, you're going to have to hire contractors or travel to do the work yourself, so your bottom line is going to be worse than if you were local. And we don't have to deal with condo stuff (HOAs can be a nightmare).

Basically, it's like home ownership (which is a huge expensive PITA) but with the added problem of not being there to notice problems AND having to deal with other people who may not care about your property at all. Believe me, if I could sell my rental property tomorrow and actually make a profit I would but HA HA, it has still not appreciated at all after 6 years so I'm stuck with it. Mutual funds are totally the way to go for low-effort investing.

TL;DR don't do it.
posted by rabbitrabbit at 4:10 PM on October 17, 2014 [5 favorites]

Don't do it. From the way you have worded your question, it seems like you do understand the broad outlines of how commercial real estate and property management works but not the all-important specifics and bugaboos. And that could get you into big trouble. Loopnet is full of out of state properties with enticing cap rates, and there is almost always a very good reason why they're so underpriced. It's because of hidden factors that cause experienced investors to stay away from them. I think you were wise to come and ask this here. If out of state real estate income investment is something that interests you, I urge you to talk with people who are doing this themselves before pulling the trigger. There are also lots of great books out there. Good luck!
posted by dacoit at 4:17 PM on October 17, 2014

I really wouldn't want to do this without a property manager.

"ring ring Hi. Sorry for the late call. Yeah, the water heater just exploded. Please call a plumber click".

If this is you and it's your own house you might schedule the fix for a few days out (it's soooo expensive to call in a plumber on a weekend) and shower at the local gym for a week. But you have tenants and they'd like a functioning water heater within 48 hours just as you stipulated in the contract. Now you have to schedule something like this (know a good plumber?) from a couple of cities away. Oh, and they can't be there during the day. Sorry. They work long hours.

If my experience is anything to go by, at least one tenant will skip out after not having paid rent for six months. You might want to budget for that.

I'm not saying don't do it, but our property has depreciated and I think we typically end up getting 9 months of rent a year (what with people skipping out and gaps in rental and everything). Luckily, I don't spend a lot of time thinking about it.
posted by It's Never Lurgi at 4:20 PM on October 17, 2014 [1 favorite]

These questions come up frequently enough that I'm going to coin Haddock's Second Law: If you're asking AskMe whether you should be investing in real estate, you should not be investing in real estate.

I grew up in NYC and can appreciate the desire to be a landlord--I mean they're the ones with all the cards, right? But no.

If you want real estate exposure, buy a REIT. Say it again, with feeling: if you want real estate exposure, buy a REIT.

To follow through on your plan, you need: a real estate lawyer you trust implicitly in the relevant jurisdiction. A solid understanding of the LL/T law in the jurisdiction in question (lead abatement? eviction? warranty of habitability?); a solid understanding of the liability shield you'll need; any foreign corporation requirements of the jurisdiction in question; understanding of the IRS passive activity rules and how that will affect your ability to take deductions from the property; the tax rules of your home state and the jurisdiction in question w/r/t real property leases; either contractors you trust implicitly or a management company you trust implicitly; a means by which to screen tenants (including your potential commercial tenant); etc.

And while you've left out the salient numbers, what are talking about here: a $200K property to make, maybe, $750-1000 a month? Call it maybe 6% a year, assuming no extraordinary expenses, and leaving aside all the little costs (tax accountant, formation of an LLC to hold the property, out of state fees for your LLC to do business in the jurisdiction, costs to visit the property, fix a boiler etc.). The amount of risk by concentrating that $200K for 6% (or less?) ROI just seems madness to me.

If I were to invest in real estate, I'd certainly just start with a two-family home that I'd personally occupy.

This is not legal, financial or other advice to you, and I am not your advisor in any capacity. Jiminy Crickets, get some competent advisors in your jurisdiction and the jurisdiction you're looking at. Look in to your local chapter of the REIA.
posted by Admiral Haddock at 5:04 PM on October 17, 2014 [2 favorites]

Would you settle for about $500 a month with much less risk and no work? Look at putting your $150k into the Vanguard Managed Payout Fund. The fund takes care of everything for you - building a balanced diversified portfolio so they can pay you a steady 4% while retaining enough capital gains that your balance will grow at least enough to keep up with inflation. I particularly Vanguard for this type of thing because their annual expense ratio is only a fraction of a percent (0.34%)
posted by metahawk at 5:23 PM on October 17, 2014 [4 favorites]

I invest in real estate. Own rental properties, have done flips, and more.
I think real estate is a great investment strategy.

But, it is very much a self-directed type investment. You can not buy it and forget it, like you would with many other investments. Part of your return is earned through sweat equity. You must be actively involved in managing the asset.

You can successfully buy a property in another city, but you absolutely need a solid network in that city. The solid network for a real estate investor includes: a realtor (property manager), lawyer, plumber, title company, and other professional services. Do not buy real estate in another city unless you have had boots on the ground there, and have developed a strong network to help you manage and maintain your investment.

I see in your profile that you live NYC. That is a very difficult place for a beginning real estate investor to start. Everything you might look at is big money. In many ways, because you live in NYC, if you want to get involved in real estate investing, you will have to start in another city.

But, you must identify that other city verify carefully. You must go there often. A place you are familiar with, and have friends and family - people who can recommend an honest roofer, if you should ever need a roofer (and eventually you will).

Once you identify your investment city, then you need to work hard to cultivate a professional network there. You should join the REIA in that city. REIAs are Real Estate Investor Associations - networking groups for real estate investors. You need to make an effort to attend to monthly REIA meeting in that city, and work your networking skills, handing out cards and talking to people. Learning the market, and looking for good deals.

Sometimes they say you should look at a hundred houses in an area before you buy your first. That seems extreme, but you have to learn the local market.

Real Estate investing can be very profitable, and you can own a great house. But, it is more like running a small business then it is investing in stocks.
posted by Flood at 6:36 PM on October 17, 2014 [3 favorites]

Hello toomuchkatherine, your idea sounds excellent in theory but in reality, I think it may be more along the lines of high stakes gambling. Not just for the reasons stated by the knowledgeable posters above, but also from a tenant's perspective and an insurance perspective. To start with the insurance issue, my layperson non-professional personal opinion is that it is challenging to get insurance when it is an absentee landlord situation, let alone an absentee landlord renting out a condo to individuals who are not immediate relatives (such as a parent, sibling, or child)...

Keep in mind some types of insurance policies, depending on the type of rental, will require inspections by the insured or a representative on a regular basis. For this you will need a property manager if you live far away. Some people may designate their friend, neighbor or relative who lives nearby as a property manager, but if you do not have the luxury of a trusted person nearby who can do this for free this will cause problems. Even if you did, sometimes issues arise when it comes time to sign legally binding documents that these people will check.

Also, it is expensive to get coverage for tenants or their guests causing damage to the unit. In some locations or situations this option is unavailable. So, to get insurance that will cover you in the event of the issues you are most concerned about, be prepared to pay a larger sum than you may be budgeting (and hire a property manager - more costly) or go without the coverage.

Insurance for a condo may be cheap but look closely at what is actually covered. The policy you buy may be cheap because the condo board is covering the major problems (for a general example, if a fire burns down the entire building) but what if your tenants decide to vandalize the place?

Leaving the insurance issues aside, there is also the question of what to do when you have a problematic tenant. Depending on where you rent, the eviction process could drag on for months during which time you might not receive rent (depending on the situation) and will not get any insurance money should the tenants choose to trash the home. It is not such a troubling issue if you rent to a family member or friend, though these scenarios also have major drawbacks, but it can become quite scary if the person you choose as a tenant is a stranger.

Speaking of tenants trashing the unit, depending on what they do and the nature of the dwelling, they may create a situation where neighboring dwellings are damaged and you end up getting sued.

Also think about it from the tenant's perspective. If a tenant is going to spend the average rent for a nice condo in the area they will likely want a landlord / property manager who is available in the event of any issue and can respond quickly - after all, this is what you are being paid for. For example, where I live there is a property manager living on site and even the most mundane issues will get a response and resolution from the landlord's representative the same day. I have excellent appliances and a quiet building. This is why I have no issue paying the maximum going rate for a unit in my area, though you could technically get a similar one bedroom unit with five appliances for $400 less a month. Are you judging your potential earnings based on this optimal case with luxury appliances and attentive service from the management team?

Sorry I have given you horrible things to think about... Your idea can work well if you can find a trustworthy tenant, provide good service for your tenant, and have a decent building. What I wrote makes it sound like mainly the tenant and their preferences is the wild card but in reality you might buy a unit in a poorly constructed building (even if the unit is expensive and in a great part of town), and if the building is "cheap" it will exhibit endless problems even with great renters. It could be as miserable as structural issues / cheap appliances that break down horribly, or as mundane as your good tenants trying to deal with your unit's poor soundproofing.
posted by partly squamous and partly rugose at 7:08 PM on October 17, 2014

do not buy a condo as an investor/absentee owner under any circumstances. a free-standing single family residence that isn't part of a HOA may be ok if you get a good deal, but you have to know what to look for, and it doesn't sound like you do.
posted by bruce at 8:19 PM on October 17, 2014 [1 favorite]

Response by poster: Thanks, all, for attending to the specifics of this (I know) sort of common question. I am getting the picture. Maybe I just have to be patient and wait and buy a duplex or something when I do move away from here.

One follow-up question for Bruce: why is a free-standing single family residence a better idea? Just because condo boards make things more complicated more than they make them easier? Or is there something else?

REITs and the Vanguard Managed Payout Fund are both good ideas. Thanks.
posted by toomuchkatherine at 10:49 AM on October 18, 2014

a condo HOA can have unpleasant surprises in its financials, or just its physical form. is the reserve account sufficient to maintain the infrastructure, roofing, painting, plumbing, etc., because if not, you will be subject to surprise assessments. it's another layer of government, and at its worst, it's run by moronic, self-interested poobahs, satraps and busybodies. do not buy a condo unless you are going to live there and are prepared to get yourself elected to the board to run it, like i did. i wouldn't do it again at my age.

now REITs are a good idea if you want diversified real estate investment with no management hassles. i've done ok in them.
posted by bruce at 11:08 AM on October 18, 2014 [1 favorite]

I have friends who owned a rental property in an HOA neighborhood. They had to be on the board to make sure that the board did not change the rules to disallow rentals. Then for some reason they weren't on the board anymore, and guess what the board voted to do? You got it. I think they had to sell at a loss, because what choice did they have?
posted by rabbitrabbit at 9:02 AM on October 20, 2014

« Older Hire me even though I ran out so fast you saw a...   |   Parents Night Out!!! What should we do? Newer »
This thread is closed to new comments.