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Should I be a Landlord or a Passive Real Estate Investor?

Should I be a Landlord or a Passive Real Estate Investor?



Hey everyone, I’m on vacation this week and we have a guest post from Amy Kirsch, RealtyShares Vice President of Investor Sales and Client Success. Today, she’ll share her experience with being a landlord and a passive real estate investor. See which one she likes better. I’ll be back next week. Thanks!

Amy has over 10 years of experience in real estate and financial services. She has worked for Merrill Lynch, Dearborn Partners, and JP Morgan. When she’s not at her desk, she enjoys traveling, karaoke, and her adorable dog Belle.

As investments go, real estate has a lot going for it. It’s a hard asset, meaning you can reach out and touch it. The land area of the Earth is more or less fixed. And—regardless of the state of the economy—people still need a place to call home.

Maybe that’s why some ultra-wealthy investors keep about fifteen percent of their investable assets in real estate. That according to a survey of family offices conducted in 2017 by UBS Wealth Management and Campden.

Depending on your personal financial objectives, real estate investments have the potential to generate passive income while offering portfolio diversification and tax benefits. That said, it’s important to remember that they carry a unique risk profile and are uninsured, so you run the risk of losing your money.

Should you invest in this lesser-known asset class? And if so, should you buy a rental property and become a landlord? Or find an investment that requires less time and energy?

In this article, I’ll tell you about my own experience as a landlord; then we’ll talk about passive investment options that are available through online real estate investing.

My (Sleek, Modern) Rental

First, a confession: I never set out to be a landlord. I thought I was going to live there.

“There” being a gorgeous three-bedroom condo in Chicago’s Wicker Park neighborhood. It was part of a brand-new development, a six-unit building. When I saw it, I was instantly smitten. Everything from the gorgeous white-on-white tilework to the heated floors in the bathroom.

So I bought it. And I loved it! I loved my funky little neighborhood. I loved grabbing my keys and rushing out the door for work. I loved sipping an Americano at the corner coffee shop.

Then life happened. I got an amazing job offer in San Francisco and decided to move. Only now I had a problem. What to do with the condo?

Pressed for time, I decided to make it a rental. If I’m honest, I don’t know if I was ready to let go. But I did the numbers, and the numbers seemed to add up. So I put it on the market.

What Could Go Wrong?

Two years later, my experience has been…mixed. On one hand, I lucked out with my tenant. She’s been with me the whole time. She pays promptly, and she’s wonderfully low-maintenance. We have a good relationship.

On the other hand, the money hasn’t worked out like I thought it would. There have been several unforeseen expenses, and I haven’t managed to break even. This has actually been the case with several of my friends who have tried the landlord route.

So…I still have the condo, and hopefully I come out in the black when I eventually decide to sell it. I guess the main thing to realize about being a landlord is that it’s a job. At a moment’s notice, you have to drop what you’re doing and worry about things like:

  • Drugs
  • Bedbugs
  • Leaky Roofs
  • Property Taxes
  • Noise Complaints
  • Backed-up Toilets
  • Property Depreciation
  • Tenants Who Don’t Pay
  • Lost Keys in the Middle of the Night
  • Expensive/Unreliable Property Managers

The nightmare scenario is that one of your tenants is dealing drugs out of your place. Or they have an apartment full of parakeets. Or they don’t pay, and it takes forever to evict them. Or all of the above.

The upside is that, if everything goes according to plan, you’re earning (fairly) passive income and (possibly) not paying any middlemen.

OK, What Are My Options?

There are actually several ways to passively invest in real estate—ones where you don’t have to evict drug dealers or call a locksmith in the middle of the night.

Probably the most popular option is a publicly-traded real estate investment trust (REIT). These funds are professionally managed and contain multiple assets; when you buy in, you’re investing in a pool of many different properties. (One of the potential downsides is that, since publicly-traded REITS can be bought and sold, they tend to track more closely with the performance of the stock market.)

You can also directly invest in an individual real estate property, i.e. buy shares of debt or equity in a given project.

A Brief Introduction to Online Real Estate Investing

Back in 2012, President Obama signed the JOBS act.

Among other things, it prompted the creation of online platforms that allow groups of investors to come together and directly invest in real estate. The result has been a flowering of alternative financing sites that specialize in everything from commercial real estate to residential “fix-and-flip” opportunities.

Let’s take a hypothetical example. A developer is trying to get $8.5 million in financing to renovate a 20-unit apartment building in Des Moines. Typically, he raises money from his family, friends, and network; now he’s looking to expand his investor base.

Fortunately for the developer, there are millions of individual accredited investors around the country who may want to invest in his project. So he agrees to sell securities (either debt or equity) as an investment opportunity on a real estate investing platform.

If the developer’s business model performs according to plan, then it’s a win for both the developer and his investors. The project, which may not otherwise have found financing, moves ahead. And the investors have the potential to earn passive income.

It’s important to acknowledge that, whether we’re talking about being a landlord or investing in real estate securities, real estate investments carry risk and are not guaranteed. Even when projects are carefully underwritten, some will still underperform. That means you could lose money, including your original investment. Investing in real estate securities investments also carry additional risks including illiquidity and long lock-up periods.

What Makes Online Real Estate Investing Different

When you get right down to it, that’s what makes online real estate investing different from being a landlord: it has the potential to provide truly passive income.

Let me paint a picture of how that might look.

  1. Arrive at a good understanding of your personal financial goals and risk tolerance
  2. Browse a list of carefully curated investment opportunities
  3. Do your due diligence and select the investment(s) that match your objectives
  4. Invest, sit back, and monitor the performance of your investments

So…not all that different from evicting a drug-dealer and his apartment full of parakeets, right?

That said, not all real estate investing platforms are created equal. Some deal with commercial real estate, some residential. Some offer debt, some equity, some both. Some are straightforward marketplaces, where almost anyone can sell almost anything. Others are curated marketplaces, offering carefully vetted & underwritten opportunities.

So…refer to step one, above. Real estate may well have a place in your portfolio, but the only way you’re going to figure that out is if you take the time to do your due diligence and arrive at a good understanding of your own personal financial goals.

The Big Question: Landlord or Investor?

Of course, many people around the country make good living being landlords. Some may even enjoy it.

The important thing is to go in with your eyes open. If one of my friends were thinking about becoming a landlord, I would ask them:

  • How well do you know the neighborhood?
  • Do market data show that there is demand for your property?
  • How old is the building? Is it structurally sound?
  • Weatherproof? Seismically retrofitted? Handicap-accessible? Bug-free?
  • What if taxes change? Will you still be in the black?
  • What if the market changes? Will people still want to live there?
  • Do you have the time to manage this thing?
  • How about the expertise? The desire?
  • Are you ready for the middle-of-the-night phone calls?
  • The unforeseen expenses? The leaky roofs, the broken dishwashers?
  • How about a drawn-out legal battle with a nightmare tenant?
  • Do you have the time and resources to fight it out?

Because let’s be honest. When it comes to owning property and being a landlord, the primary risk is you.

I have to admit, if I could do it all over again, I think I might choose to spread the cost of my condo across several different investment types and asset classes, including real estate & stocks. The goal would be passive income and a diversified portfolio rather than a single asset that keeps me up at night.

But hey, that’s just me.

* * *

Disclaimer: All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.

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