Written by Emily Koelsch
Investing Out of State
Out-of-state investing is an increasingly popular strategy for real estate investors. Property values vary significantly from one state to the next. For investors who live in expensive markets, investing out of state often means a lower entry price and an increased rate of return.
In addition, there are lots of tools available to make it easier to manage rental properties from out of state. This means that investors can still self-manage their properties to further improve returns.
The combination of these factors has made out-of-state investing an increasingly popular choice. That said, it presents some unique risks and challenges for investors. To help you decide if this strategy is right for you, here’s a look at some things you need to consider before investing in out-of-state real estate.
Rental Market Research & Property Analysis
Research is one of the keys to successfully investing in new markets. Before picking a location, you want to do plenty of research to ensure it’s a good option for the short- and long-term. Look at a variety of different data points, including:
- Housing prices
- Recent housing appreciation rates
- Economic growth
- Employment rates
- Rental demand
Once you’ve found a market that you’re comfortable with, you’ll also want to do a full financial analysis of any properties you’re considering. This should include:
- Target purchase price based on comparable sales
- Estimated rent amounts
- Taxes
- Maintenance expenses
- Overall operating expenses
This analysis will give you an estimate of your monthly cash flow and your return on your investment. Doing this analysis is important in all markets, but it’s particularly important when entering a new area or market.
Create a Network & Local Team
Once you’ve found a market and property you like, the next thing to do is build a local network and team. This should include:
- A real estate agent with expertise in the area and investment properties
- A contractor and/or handyman that can help with big and small projects
- An HVAC professional
- A plumber
This is the core team you need to purchase and manage a rental property remotely. You can also benefit by having a network of local real estate investors or by connecting with neighbors who can help keep an eye on your property.
Become Familiar With Local Landlord-Tenant Laws
Each state has its own Landlord and Tenant laws. These laws can impact how you manage your property. For example, state laws control:
- What has to be included in a Lease Agreement
- The collection and handling of security deposits
- Late fees
- Notice requirements for entering for a non-emergency
- Lease renewal notice requirements
- Landlord and Tenant responsibilities
Before entering into a Lease Agreement, Landlords need to be familiar with the laws of the state where their property is located to ensure that they comply with all applicable laws.
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Consult a Tax Professional
Out-of-state rental properties can make taxes more complicated for investors. Because you’ll be earning income in a new state, it can impact how you run your business and file taxes. Before investing in a new state, talk with your CPA or tax professional about the tax implications of expanding your portfolio in a new state.
Tips for Getting Started as an Out-of-State Investor
Despite the unique challenges that can come from investing out of state, many investors decide it’s the right choice for them. If you decide to move forward with this strategy, here are some tips to help you get started:
- Consider locations you’re somewhat familiar with – for example, where you went to college, have family members, or used to live. Some knowledge of the area will give you a great head start. Plus, it usually means you already have some contacts to help start your local network.
- Never buy sight unseen. Pictures, videos, and virtual tours are increasingly popular in the real estate industry. While these are helpful tools, they’re not a substitute for seeing the property yourself. Before buying a rental property, always look at it in person. This will ensure you’re making an informed decision about the property and the location.
- Schedule regular in-person inspections. While you can do most of your property management digitally, you still want to periodically inspect the rental property. Plan for this from the outset and prioritize annual property inspections.
- Take advantage of tools that make it easy to be a remote or digital Landlord. For example, Tenant Screening Services, online Lease creation and electronic signing, online rent collection, and a digital system for Tenant maintenance requests.
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In a landmark settlement, a property management company and its landlord have agreed to pay a significant sum following allegations of violating the Servicemembers Civil Relief Act (SCRA).
The U.S. Attorney’s Office, Eastern District of Virginia, recently announced the settlement involving a claim between a servicemember homeowner and their landlord and property management company, McGowan Realty LLC, operating as RedSail Property Management. The complaint alleged that the defendants violated the SCRA by imposing early lease termination charges and additional rent on a servicemember.
An overview of the Servicemembers Civil Relief Act (SCRA)
The SCRA is a federal law enacted to provide legal protections and relief to active-duty servicemembers of the United States Armed Forces. Originally known as the Soldiers’ and Sailors’ Civil Relief Act (SSCRA) when it was first passed in 1940, it has undergone amendments and updates over the years.
The SCRA aims to ease the financial and legal burdens placed on servicemembers during active duty by postponing or suspending certain civil obligations. For example, the law allows servicemembers to request a postponement of civil court proceedings, such as lawsuits, foreclosures, or bankruptcy proceedings if their military service materially affects their ability to participate. It also protects servicemembers’ property, such as vehicles, against repossession for nonpayment while they are on active duty.
This lawsuit involved a different provision of the SCRA, which allows servicemembers who receive permanent change of station orders or are deployed for at least 90 days to terminate their residential leases without penalty. Landlords are prohibited from imposing early termination fees or requiring payment of rent beyond the termination date specified in the SCRA.
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The allegations of SCRA violations in this lawsuit
Here, the defendants refused to honor a servicemember’s lease termination after he received a permanent order to a new duty station 33.5 miles from his residence in Virginia Beach. The defendants argued they were covered by the Virginia Residential Landlord and Tenant Act. Unlike the SCRA, the Virginia law allows servicemembers to qualify for early lease termination only if they must relocate 35 or more miles from their current residence. Therefore, the defendants forced the sailor to pay $3,408.55 in early termination fees plus additional rent.
The Department of Justice argued that the SCRA offers “relief to servicemembers who would otherwise be forced to pay rent for housing they cannot occupy because they have been ordered to move to another location.” The federal law, they argued, trumped state law in this case because the SCRA has no distance limitation. Moreover, while the SCRA allows a landlord and tenant to waive the applicability of the rules, there was no such waiver in this case. A waiver must be executed in writing separate from the lease.
After spending 14 months and $50,000 in attorneys’ fees litigating the case, the defendants opted to settle. The consent decree requires the defendants to pay the servicemember $10,225.65, which includes the unlawful termination fees and additional rent plus two times the unlawful fees and additional rent assessed. The decree also orders the defendants to pay a $3,000 civil penalty to the U.S. Treasury. Moreover, the company must provide SCRA training for its employees and avoid imposing the 35-mile restriction on leases involving qualifying service members and their dependents.
What this lawsuit means for landlords
The resolution of this case sets a precedent for the protection of SCRA rights nationwide. All landlords should be aware of how the SCRA affects their relationship with tenants. In litigation failure to provide a servicemembers affidavit can derail proceedings, wasting the time, effort, and resources of the landlord. Even out of court, failure to abide by SCRA rules can be an expensive mistake.
Source: JD Supra by Ryan Kennedy
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By John Triplett
The U.S. Department of Housing and Urban Development (HUD) has issued two guidance documents addressing the application of the Fair Housing Act to two areas in which the use of artificial intelligence (AI) poses particular concerns: the tenant-screening process and its application to the advertising of housing opportunities through online platforms that use targeted ads, according to a release.
“We have released new guidance to ensure that our partners in the private sector who utilize artificial intelligence and algorithms are aware of how the Fair Housing Act applies to these practices,” acting HUD Secretary Adrianne Todman said in the release.
Demetria McCain, principal deputy assistant secretary for Fair Housing and Equal Opportunity said, “Housing providers, tenant-screening companies, advertisers and online platforms should be aware that the Fair Housing Act applies to tenant screening and the advertising of housing, including when artificial intelligence and algorithms are used to perform these functions.”
“Housing providers have a legitimate interest in selecting tenants who will pay their rent and otherwise comply with lawful requirements of their lease. However, some tenant-screening practices do not in fact serve these goals.
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“Tenant screening based on imprecise or overbroad criteria may unjustifiably exclude people from housing opportunities in discriminatory ways. These issues have been magnified in recent years by the increasing reliance by housing providers on tenant-screening companies to drive tenant-selection decisions.
“An increasing number of tenant-screening companies claim that they use advanced technologies, such as machine learning and other forms of artificial intelligence (“AI”). These technologies can increase these companies’ capacity to access and analyze information about applicants that has not been widely used for rental decisions until recently but may have little bearing on whether someone will comply with their lease.
“These technologies can also lead to a less transparent process by obscuring the precise reasons for a denial from the housing provider and applicant,” HUD says. “The Fair Housing Act applies to housing decisions regardless of what technology is used. Both housing providers and tenant-screening companies have a responsibility to avoid using these technologies in a discriminatory manner.”
On the advertising side, HUD cautioned that online advertising-targeting tools are covered by the Fair Housing Act. The release said violations “may also occur when ad targeting and delivery functions are used, on the basis of protected characteristics, to target vulnerable consumers for predatory products or services, display content that could discourage or deter potential consumers, or charge different amounts for delivered advertisements.”
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