An increasing number of people in well-paid jobs are unable to buy homes close to work. This is a particular problem for those located on the US coasts where property is amongst the priciest in the country.
Now, according to a Reuters article, increasing numbers of people in this situation are targeting markets outside these expensive areas and are purchasing houses to rent in more affordable markets. This option is becoming more viable thanks to several start-up companies that offer investors new ways to buy, renovate and rent out homes in markets where rental values are relatively strong, but house prices are low. Investors still face the same types of risks of any landlord, as they will still have to deal with home repairs and vacancies, and they are putting their faith in relatively young companies that do not have proven track records.
However, these management firms claim they can take much of the stress out of owning an out-of-state rental. Typical fees range from 3% for acquisitions to 7 to 10% for property management. Most of their clients will purchase one or two homes to help bring in additional income and to diversify their portfolios.
Apparently, many of these buyers are from costly coastal areas like California and this is helping to boost demand and real estate prices in the lower cost areas being targeted. They are able to purchase and renovate properties and can rent them out without ever seeing the properties or tenants. The attraction of doing this is the steady stream of income it can yield. For example, a single family home in suburban Atlanta can bring in a 25.8% gross annual yield. This compares to an annual yield of just 3.4% in the San Francisco Bay Area. Most of the properties purchased through these firms cost between $50,000 and $150,000, prices that are typical for first-time buyers in these markets.
While Florida has been a favorite destination for out-of-state investors for a very long time, other states such as Ohio, Tennessee and Georgia are rising in popularity. Obviously, these types of purchases aren’t without risk and one problem faced by buyers is a lack of local knowledge. Common mistakes include failing to take into account the local vacancy rate and failing to account for the potentially high cost of property insurance in areas susceptible to natural disasters.
Another potential problem is that the rental market is cooling. Since 2010, rents have risen by an average of 4.1%, but the average rents in more expensive markets have fallen, which could potentially affect the broader rental market in the future.