Should you buy rental property near your home?
I didn't set out to own real estate in two states, but life takes funny turns.
I bought a condominium in central New Jersey when I was single. When I got married five years later, we moved to Minneapolis, but I kept the New Jersey place as a rental.
We bought a house here, and two years ago we purchased another rental property: a condominium in St. Paul, about a 20-minute drive from our home.
That's given us the experience of managing rentals from both up close and far away. I don't know that one is definitely better than another, but they do have different pluses and minuses.
Let's take a look at three major differences.
Difference 1. Cost.
It costs more, in both management expenses and other outlays, to own real estate that's in another state.
Our biggest expense is management. We have a professional manager for the New Jersey property.
He takes 15% of the monthly rent, which seems to be pretty standard. Fifteen percent of zero is zero, of course, so he has a financial motivation to keep the place rented.
If he finds tenants who follow the Rules for Renters that I learned at my mother's knee — pay the rent on time, don't wreck the place, don't irritate the neighbors and speak up when something breaks so we can fix it — then his job is simple. He accepts a monthly rent check, takes his 15% and forwards me the balance.
If he finds problematic tenants, that means more work and less income for both him and me.
The manager also arranges repairs and replacements when things go wrong. He doesn't charge me for his time — it's included in the 15% — but he typically doesn’t fix things himself, either.
He hires professionals and I pay them. This, of course, costs more than going over and unclogging the garbage disposal myself.
Although I trust our manager, I like to walk through the condominium myself annually, to make sure things are shipshape and to arrange for any maintenance the tenants haven't mentioned. The IRS lets me deduct the cost of a trip once a year.
We have to pay taxes on whatever profit we make in the state where each condo is located, so we file a federal tax return and state returns in both New Jersey and Minnesota. It's a hassle, but not an enormous one.
In addition to paying our manager, we also pay the condo association a monthly fee, which covers such things as trash removal, snow shoveling, landscaping, and the care and upkeep of common elements, which include the roof, outer walls and balconies. There are 440 properties in the association.
Otherwise, we have little to do with the condo association for our New Jersey property, which is a sharp contrast to our St. Paul condo.
Difference 2. Involvement.
Our St. Paul condo is one of 11 units — so everybody has to get involved.
We go to association meetings, and my husband is association secretary.
We also pay a monthly fee, on par with what we pay in New Jersey. Here, however, we put in a great deal more time.
That time is often spent either fixing things or arranging for them to be fixed. My husband's hard work has saved us money, but it's also meant some time spent researching repairs, actually fixing things, calling contractors, letting contractors in and so forth. In New Jersey, we toss money at maintenance issues, and the problems get solved.
Because the St. Paul association is so small, we know the other owners decently well. Most of them live in the units, and I think they would say so if they were having a problem with one of our tenants.
I also suspect they would resent us if we were absentee landlords, because the association relies on owners to run the place. The New Jersey association is much bigger and spends money to pay professional staff, so no one notices or cares that we're not active.
Difference 3. Choosing tenants.
In New Jersey, I've never met our tenants. Our manager selected them from the folks who answered an ad, and they spend every day alone with my $200,000 investment. Sometimes that feels a little weird.
On the other hand, there's no danger that I'll let whether I like or dislike the tenants affect decisions about rent or maintenance. Anonymity helps preserve a business relationship.
In St. Paul, I've met the tenant. He came with the place when we bought it. I like him but don't want to be his close friend, which is perfect.
Eventually, he will move, and then we'll have to pick a new tenant. This will give us more control over who lives in our investment.
However, it also means that someone less experienced than our New Jersey property manager — me and/or my husband — will choose the next tenant.