Are You a Landlord or a Real Estate Investor?
As the owner of rental property, your motivation for purchasing may have been to earn some extra income, increase your net worth, obtain tax benefits – or possibly all of the above.
The truth is that there are numerous advantages to buying income producing real estate. But there can also be several potential drawbacks, starting with just how much time you spend working either on or in your business.
Taking a Closer Look at Managing Your Properties
Property management can come in a couple of different forms. On one hand, you can opt to keep close ties with the property, as well as the tenants who reside there. On the other, you may instead decide to hand off the work to someone else and pay them for their services.
With that in mind, there are different ways of going about the ownership – and the long-term prospects – of your rental properties. And, while both can have nice advantages, there can also be some potential items that you should consider.
For example, landlords will usually have one or just a few properties. These are generally located close to home (or at least within a reasonable driving distance). A landlord may also be quite knowledgeable when it comes to repairing and maintaining property. That way, they can either fix a problem right away, or contact someone else who can.
As a landlord, you will be wearing many different hats, and you will typically be required to manage everything yourself, including:
• Advertising the property for rent
• Showing the property
• Screening potential tenants
• Negotiating the lease
• Collecting monthly rent (and contacting tenants if the rent payment is late)
• Evicting tenants
• Repairing and maintaining the property
• Responding to emergencies
Each of these duties individually can be fairly time consuming. For example, the process of screening a potential tenant can require several steps such as reviewing an individual’s credit report, verifying employment and income, and contacting the landlord or property manager at their previous residence.
Depending on the amount of time you have available, performing all of these tasks yourself could allow you to net more of your real estate profit, as versus having to pay someone else to take care of it. But at some point – especially if you intend to purchase and rent out multiple properties – you could run out of hours in the day keeping up with all of these tasks.
A real estate investor will oftentimes approach the property management tasks somewhat differently. For instance, an investor will manage his or her properties, but will not actually perform the physical work such as fixing leaky toilets, or even collecting rent directly from the tenants.
Because many of the day-to-day operations – including dealing with tenants – will be delegated to the property manager, the tasks of a real estate investor will typically be just a small percentage of those that a landlord will have to perform. These will usually entail the following:
• Approving expenses
• Communicating with the property manager (or property management company)
While there will certainly be a monetary cost that comes along with hiring a property manager, in many cases, this can be well worth it – especially if you had already factored in this amount to your initial cash flow projections.
Having your time freed up from the day-to-day duties can allow you to focus more on other things, which can include the purchase of additional properties for your real estate portfolio. It may even provide you with the ability to expand your property investments much more quickly. That being said, the property manager that you choose to work with can play a key role in your overall success.
Choosing the Right Property Management Company
In choosing a property manager, there are some important things to keep in mind. For example, you will want to ensure that the manager or management company has an ample amount of experience in working with the type of property (or properties) you own. You will also want to make sure that they will provide your properties and your tenants with good, quality service.
In making your decision, then, there are several questions that you should ask prior to moving forward, such as:
• What type of property do you have the most experience with managing? (single family, multi-family, apartments, etc.)
• How long have you been in the business of property management?
• How many units to you currently manage?
• Do you personally own any rental real estate?
The Bottom Line
While being a landlord can be a great exercise in learning to manage and maintain property, it can also be a time consuming endeavor. With that in mind, prior to moving forward with the purchase of any property, be sure that you factor in both the time commitment that will be required as a hands-on landlord, as well as the cost in your cash flow projections of hiring a property manager. That way, you will be better able to determine what will be required either way, as well as your estimated cash flow going forward.