Be Honest...Are Your Real Estate Investments Passive?
by Christopher Levarek
“Your time is limited, so don’t waste it living someone else’s life.”
- Steve Jobs
Picture this, you finally save up enough capital to invest into a real estate property, a duplex needing some tender love and care (TLC). After fixing up the property, over a few weekends/nights, and renovating with some contractors over few months, you rent the property to your first tenant at a 6 month lease. You've done it, cashflow and passive income on it's way. Soon, you will be in financial freedom land and quit your job.
Suddenly two weeks in, you get a call that the toilet won't flush at 8 pm at night. You call a plumber, to find there are tree roots clogging the pipes costing $1500 to repair. No biggie, you say, just some "bad luck". Two months later however, your tenant tells you the dryer is not working over a phone call on a Sunday afternoon.
You head over to find the tenant hasn't changed the filter in 2 months and it is full of lint. After explaining how a dryer works, you clean the filter and head back home.
Four months later, as your 6 month lease ended with the first tenant, you are putting a new tenant in place. You ran your screening process on some candidates for few hours after work and finally found a good tenant after turning down 4 applications. You send the lease for signatures and tell yourself, this is the life, this is passive income.
Or is it?
The scene above is actually quite common for real estate investors of all experience levels. Often what was supposed to be an investment based on becoming more free, turns into another job.
Instead of a hands-off investment, the investor is spending hours per week on various tasks managing tenants, issues and surprises. Family life, hobbies and even careers end up suffering in most cases.
Now, if you are comfortable with hands-on active investing, such as the above, you can really make some positive movement towards a future financial goal. Active investing definitely has it's place as the investor controls all the pieces on the board. Yet, if this is not the desired lifestyle, it's important to decide that early on. Being stuck managing properties can be overwhelming and often doesn't even match an investor's goals!
So what does passive investing look like?
Well, like it sounds passive investing is where the investor plays the role of investing capital only. Once this role is played, the investor should be hands off for the most part. Imagine investing in index funds or your 401k, this is what investing passively looks like. The investor is able to focus on a career, family or passion without managing the real estate investment.
An example would be if an investor invests into apartment complex or commercial asset along with other passive investors in a real estate syndication. Once the investor signs the investment documents and wires the capital, there really isn't much for the investor to do.
The investor simply receives monthly/quarterly cashflow distributions and investor updates from the Managment Team of the property.
So let's do a quick question/answer to help see, are your real estate investments passive? And if you are new investor, this will help guide as well to choosing early which to pursue :
Do you spend more then 1 hour a month working on your real estate investment?
Do you invest local to you so you can fix or help with physical issues?
Do you play multiple roles in your real estate investments? Renovations? Repairs? Accounting? Legal? Property Finder? Property Management? Capital funder?
Do you take calls from tenants, contractors or property managers regarding your investment property?
Do you often feel confused, annoyed, frustrated or overwhelmed when thinking of your real estate property investment?
See easy enough. Now for the diagnosis...
Drum roll...
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If you answered yes to any of the above, you are most likely an active investor or looking to be an active investor. That's it! Your real estate investments are not passive!
No matter how much you might like to think they are, it's time to be honest, they are not passive.
A truly passive investment is completely hands off. Take it from me, I have invested actively in over 50+ units and I also invest passively in over 650+ units, so I am very familiar with the level of effort or work in both.
Let me also assure you I am not trying to convince anyone to not be active in their investments, I'm simply saying be clear on your goals so you can choose the path for you.
Many a person desiring more time or financial freedom ends up giving up both by being an active investor. I’ve seen it over and over again. So, my advice is simply make sure you know which one you want to be and take action to get there.
If you are interested in moving into more of a passive investor role, I encourage you to reach out by signing up for Investor Club. Not only will you speak with a member of our team about your investments and investing goals, you will gain access to any passive investment offerings we are providing throughout the year.
Happy Investing!