A Word About “Passive” Income
What does passive income really mean?
The short answer is that it means different things depending on what stage of the process you are in.
For me, since I have easy to manage properties in good condition with good tenants, I’m still doing the management myself. I often call my real estate income “passive” because I only have to put a few hours into it per month, but that’s not quite an accurate way to describe it. When there’s a problem at a property, especially if I’m on vacation at the time, it definitely doesn’t qualify as passive. I’m responsible for the safe and habitable living quarters for all my tenants, and I take that responsibility very seriously. If I had other plans that day – too bad! Tenants’ needs have to come first. Sometimes that means writing a big check, and that’s never fun.
If you have the skills, are committed to staying up on all applicable laws, and have a real estate license where required, then you may not want to share your proceeds with a property management company until you build up your portfolio of properties.
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However, if you are missing too many of those skills, investing properties many units, are not investing locally, are not comfortable dealing with tenants, are not willing to take time to keep up to date on all the fair housing and other local landlord-tenant laws, or want an extra layer of liability protection from using an experienced company to look after your properties and tenants*, then a property manager is a must! But they have to be a good one, and they are not cheap.
Fees vary from small to large percentages (10% plus first month’s rent is standard in my area) and you have to also figure in any extra time between tenants that they require. Some property managers will market the property one or two months before tenants move out, whereas others will wait until the apartment is empty to market it, meaning you are guaranteed to have a loss of income during each changeover – in some contracts this is a month minimum.
There are also property managers who charge a flat monthly fee instead of a percentage of rent and regardless of whether or not the unit is vacant, so this is not an incentive for them to find you a tenant quickly and for top dollar. There may be some instances when flat fees can be a benefit, but keeping them incentivized is something to consider when choosing a property manager.
Some property managers will also provide you with discounts on contractors they use often and mark up any extra services provided to your tenants so that you are paid not only by rents but also by such things as lawn care or other a la carte options for tenants. A good property manager will also have a strong marketing system in place, know the proper price points for your area, and save you from vacancies.
There are many variables, and that’s why it’s good to learn as much as you can before jumping in. Be sure to check their license as well if a licensed real estate agent is required to manage properties in your state, and if so, ask them what additional property management specific training or experience they have. Just have the required license doesn’t mean they have the necessary experience.
Later in life I’ll get a property manager, and I recommend this under the right conditions – it’s a must if you do not live near your properties! Once you have acquired several properties and have established a good profit margin, you may find that hiring a property manager is not only necessary but beneficial to your bottom line. With the help of a trustworthy property manager, you can then begin to enjoy truly passive income.
See also “Evaluating Property Managers”
*NOTE: Hiring a property manager does not mean you are free from all liability! You must still follow all applicable laws and safety regulations. It’s still your property and therefore your responsibility! Read your property management contract carefully, consult a real estate attorney for professional advice and to structure your business in the best way for your particular situation, check the credentials, reviews, and experience of the current property manager, (you can also search court records for additional information), and evaluate all specific property management arrangements before committing to use property management services.