Salespeople try to sell new investors on the fantasy of rental property as a passive investment. In my opinion, there is no such thing as a passive investment, let alone one that is a physical object that needs to be maintained.
Let’s go through a few of the elements of owning a single rental property:
- Up-to-date LLC formation, operating agreement, and ongoing paperwork.
- Up-to-date knowledge of local and state property management regulations
- Tenant marketing and tenant management
- Home ownership maintenance and repair management
Does performing any of these functions appear to be passive to you?
What are a few things that can go wrong with your rental property?
Lawsuits, changes in regulations, plus all of the maintenance problems you are responsible for handling. Some of these include: Electric system, plumbing, paint, carpet, countertops, stove, refrigerator, dishwashers, washer & dryer, anything that can go wrong is your problem. You have to manage the repair or replacement and pay for all of it.
What about getting a property manager to do all of this for you? Sure, but first:
- Do you know how to locate a reputable property management company?
- Do you know what needs to be included or excluded from the management contract?
- Do you know how to review their work to make certain things are being done and they aren’t ripping you off with inflated prices on repairs?
- Do you know how to manage the property management company?
- Do you know how to fire and replace the property management company?
When you hire a property management company because you do not want to physically manage the home, then you must actively manage the management company. One way or another, you must manage something or the investment will turn into a loss, possibly a large loss (due to leverage from a mortgage or other debts).
I own rental real estate and know several people who make their living solely from rental income. But the concept of a “passive investment” should never be linked with rental real estate. Someone who gets involved that views a rental as a hands-off investment is likely to learn a painful and expensive lesson.