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Is a rental property a passive investment?

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It can be difficult to make a rental property a truly passive investment.  A property manager can handle many of the responsibilities.  However, this comes with a tradeoff of lower returns from your real estate investments.  Property managers charge a fee that reduces your returns and they may not always have your best interest in mind.

Are there ways to reduce your involvement in your rental property?

Sure there are, but getting the most out of your rental property requires at least some work on your part.  A property manager can handle the day-to-day operation of a rental property.  But you need to set the vision and expectations.

Think about it.  You own a business.  Can any other business owner sit back and let someone else drive their business?  I don’t think so.  Just like any other business, understanding where your time and energy are best spent is the key to having a successful business without sacrificing all of your time or sanity.

How Much Do I Need To Be Involved In My Rental Property?

Let’s take a look at what is involved in owning a rental property and where you can be less involved.

Finding a Rental Property

Finding the right rental property is both critical and time-consuming.  And it is hard to outsource.

You need to set the criteria for your rental property. 

  • Do you want to own a condo, duplex, or single-family home? 
  • What return on investment are you expecting?
  • How much money do you have to invest? 
  • What type of tenant do you want to attract?

 

Too many of these questions are personal.  Do you really trust someone else to find you the right rental property?

While you must be involved in this critical step, a property manager can save you a lot of time.  Property managers can provide great insights into the desirability, expected rents, and necessary improvements of any property you are considering.

In addition to a property manager, your real estate agent can be a great resource.  They can help you narrow down your search based on schools, crime rates, jobs, and neighborhood amenities.

While this step in the process needs your full attention, you can lean on other professionals to ease the burden.

The good news is that you only have to do this once.  And it isn’t that different than any other form of passive investment.  Regardless of what investment you are looking at, you still need to do your research.

Getting Your Property Ready to Rent

Before finding tenants, you will want to do a survey of your rental property.  You need to address any safety concerns and check that everything in the unit is in working order.

Your property manager can do this, but if they find anything, you will need to make decisions about repairs and replacements.  Many property managers will work with contractors who will handle the repairs.

At this point, you need to get processes in place to handle tenant applications, screening,  and lease agreements.  The good news is your property manager can handle all of this for you.

Overall, this stage can be done mostly by your property manager, but you will still need to make some decisions.

Finding and Managing Tenants

Finding tenants is a big part of the service offered by a property manager.  You should, however, be aware that property managers often charge a “New Tenant Placement” fee for finding tenants.  This fee is typically 50% of the first month’s rent. 

That can eat into your returns, especially if your tenants only stay for a year or less.

Collecting rents, communicating with tenants, handling repairs and other requests, and handling evictions are another big part of what a property manager does.  You should ensure you find a property manager you trust to handle these with professionalism and respect.

If you have communicated your expectations regarding tenants with your property manager, you will have almost no direct involvement at this stage.

The cost of having a property manager handle these responsibilities is typically 8-12% of the gross rent collected plus miscellaneous fees.  You should review the fees your property manager charges so you don’t get any unwanted surprises.

Handling Repairs

Unless you are a general contractor, you should probably have someone else handle repairs in your rental property.  You don’t want to open yourself up to liability issues so having a licensed, bonded, and insured contractor is in your best interest.

Your property manager may even work with a contractor for you.  You can set a limit on what repair cost your property manager can authorize without consulting you.

For larger repairs, your property manager will consult with you before the work begins.  This doesn’t require very much of your time, and it helps you to make the best decisions for major work while allowing you to manage expenses.

Turnover

Your involvement when a tenant moves out is similar to getting the property ready to rent.  You will want to do a survey of the rental property and decide what needs to be repaired or improved before the next tenants move in.

This gives you the opportunity to make upgrades if desired.  Your property manager will have a good idea what improvements will help you either increase rent or find the right tenants faster.

During this stage, there is a bit of paperwork that has to be done to finalize the current tenant’s rental obligations.  Your property manager will handle all of the rent prorations, damage analysis, finalized utility bills, and returning the tenant’s security deposit.  You shouldn’t need to be involved.

How to Invest in Real Estate Passively

Owning a rental property sounds like a lot of work.  And it is.

What if you want exposure to rental properties in your investment portfolio without all of the work?

The good news is there are options for passive real estate investment.  YieldStreet has a good breakdown of all the different types of passive real estate investments.

Let’s take a quick look at some of the options.

Real Estate Investment Trust (REIT)

A Real Estate Investment Trust is a corporation or trust that invests in income-producing real estate.  The REIT purchases and manages multiple properties. 

Your investment in a REIT is completely passive; you invest money and get paid dividends based on the net income of the trust.  It is important to note that there are many different types of REITs.  An Equity REIT purchases and manages properties in the same way you would with your own rental property. 

REITs invest in many different types of real estate.  You want to make sure you select one that invests in commercial multi-family real estate if you want direct investment similar to owning a rental property.

Real Estate Fund

A Real Estate Fund is a mutual fund that primarily invests in REITs.  It’s a derivative investment and doesn’t pay dividends in the same way that a REIT does. 

A Real Estate Investment fund may use the dividends to increase its investments rather than paying you directly.  The value of your asset increases, but you don’t get a fixed income from the investment.

Syndication

Syndication is where an individual (the syndicator) finds a real estate investment deal and uses other people’s money to fund the deal.  The syndicator manages the property (either directly or through a property manager). 

You invest passively and have no control over the operation of the investment. 

Profits from the property are split between the investors and the syndicator.  Investors typically earn a preferred return and get paid from the first profits.  The syndicator makes money when the profit exceeds the preferred return. 

Each syndication is different so it is important that you understand how the profit-sharing is structured.

Summary

Owning a rental property isn’t the textbook definition of a passive investment.  You will have your hands in a lot of the decision-making and management of the rental property.

With the help of a good property manager, you can limit the amount of time you spend managing your rental property.  But this time savings comes at a cost because property managers can take a good chunk of your income through various fees.

Can you still produce a reasonable return with a property manager?  Absolutely.  Before you purchase a rental property, evaluate the income and expenses with the cost of a property manager in mind.  If you do this, you can limit yourself to deals that will produce a profit.

So, what will you do with all of this time you can save?  I know what I’d do.  Buy another rental property.