By Robert Irwin
Question: My wife and I want to begin making long-term real-estate investments. The market in the area where we own our condo commands high rents and has shown good appreciation over the past several years. Our dilemma is that we would like to move to a warmer climate within the next couple of years. Given the market conditions, we would like to keep and rent our condo, purchase a multifamily building and begin collecting rents on a total of four or five units. Our total monthly mortgage payments will be $4,200 and our income from rent should be $6,800. How economically feasible is it for small investors to manage properties from out of state? Can we still take advantage of the hot real-estate market in the area if we move? Or is it better to wait, transfer our equity and begin investing elsewhere?
-- Peter, Cambridge, Mass.
Peter: You aren't alone in wanting to own out-of-town real estate. There are a great many people who find that the market they are in is too expensive to offer good rental opportunities. They look where the grass seems greener in distant areas that offer lower prices and a good supply of tenants. There is just one problem: management.
I can still bitterly remember my first experience with buying real estate at a distance some years ago. I was living in Los Angeles and bought several single-family homes in Phoenix, just about a one-hour flight away. I hired what I thought was a good management company to handle them for me. Yet I found I was forced to jet over there monthly, sometimes weekly, and those travel costs added up.
Specifically, the manager always had some other problem to deal with before mine. When tenants moved out, I often had to handle the clean-up. And then there were repairs and maintenance. A leaking faucet that I could have fixed myself for 35 cents, cost me $100 for a plumber. Needless to say, it was a money-losing nightmare.
The truth is that handling rentals requires personal attention. If it is your own property, you will give it. But don't expect someone else to offer the same TLC for you, at least not for a handful of properties. In talking with successful investors, I have found that the critical mass seems to be around 20 multifamily units. At that point you can afford to have an onsite manager. If you are into single-family homes or units that are spread around, you might need twice that number.
This isn't to say that you can't manage rentals at a distance. Sometimes you get the perfect property and the perfect tenants and everything works out. But are you that lucky? The easiest thing in the world is to underestimate the cost, time and energy involved in handling rentals at a distance. The hardest thing is to try to get yourself out of that situation once you are in it. Be careful.
-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).
