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

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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!

landlord or passive real estate investorAmy 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.

This is an advertisement. We have partnered and are compensated by RealtyShares. RealtyShares is a funding platform who has partnered with North Capital Private Securities (NCPS), member FINRA/SIPC. Private securities on the RealtyShares platform are offered through NCPS. Private investments are highly illiquid and are not suitable for all investors. Neither RealtyShares nor NCPS makes any recommendations or provides advice about investments.

Photo by Breno Assis

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 18 comments… add one }
  • Tom @ Dividends Diversify July 19, 2018, 3:37 am

    Great article Amy. I have absolutely no interest in being a landlord. I can barely take care of my primary residence. I have invested in REITs for many years, but have not considered other more passive options. Thanks for putting this together. Something for me to think about and investigate more. Tom

  • Pennypincher July 19, 2018, 4:11 am

    Excellent and interesting post, Amy. I’m with Tom on investing in REITS. And I too find it challenging to keep up w/my own property!
    I would think, if you treat it strictly as a business venture, and another job, then ok. So many variables somewhat out of your control (much like life itself). Then I would guess you’d have to really be a people person as well. Sorry, not my cup of tea-ha,ha! Thanks for the good read!

  • gayle July 19, 2018, 5:00 am

    Hi Amy, I also have a studio right off Michigan Ave in Chicago, I only make $110 on it but my tenant has been there a few years, when she moves I will raise rent and make $250. Chicago taxes are what eats into the profits over the years. Do you think my condo is worth keeping ? It is easy to take care of.

  • Mrs. Groovy July 19, 2018, 5:05 am

    Thanks for sharing. Many people don’t mention the negative aspects of being a landlord. I much prefer passive investing.

    We had a property with a tenant whose work Visa expired. He was in the wrong place at the wrong time and ended up in a Federal ICE detention center for a few months. We didn’t have the heart to evict his wife and 3 kids during that time. That woke us up to the what-can-go-wrong-will-go-wrong part of landlording.

  • Felipe July 19, 2018, 6:45 am

    Yes, nice article.
    New buildings seem safer, but you pay a premium and I’ve seen more than one new local project become mired in construction defect suits that killed resale for years until resolution. But older condos have assessments for big repairs. Basically, I’ll never buy another condo.
    Single family I prefer, but collapsed sewer lines, roof leaks, cleaning gutters, plumbing issues at 2am, and tenants always want a yard but seem clueless that they take maintenance.
    REITs are nice for diversification but one pays fees for that.
    I like real estate as a hedge against inflation, and with tax law changes it makes more sense to own your own residence free and clear. If you need money, get a mortgage on the rental property where you still deduct mortgage interest and taxes.
    No easy answer on this, but you present a good discussion. Thank you!

  • Lily | The Frugal Gene July 19, 2018, 8:14 am

    Bed bugs are definitely one of my biggest fears as a short term rental person. I don’t think we have had that problem and I’m seriously praying we won’t *knock on wood* – my husband’s very interested in crowd funding real estate because you get more diversification that way without the risk of leverage and all the laws in place to make landlording hard.

  • Dan K July 19, 2018, 8:29 am

    I have no desire being a landlord ever. I’ve thought about and investigating in online real estate. Enjoyed your article, Amy. Thanks

  • Lazy Man and Money July 19, 2018, 8:59 am

    I think many people here have said the same thing that’s not really a surprise, “I have no interest in being a landlord.”

    It’s possible, and I know quite a few people who do it, to be a landlord without any of these headaches. They have property managers who act as middlemen to eliminate the hassles.

    As the end of the day, those hassles are always going to exist. It’s inherit in real estate that it will need upkeep and have rental turnover, etc. In REITs, crowdfunding, and property-managed rentals aren’t you just accepting the costs of that middleman and the work they do to eliminate those inherit hassles for you?

  • Dave in Sunny FL July 19, 2018, 10:06 am

    This was a pretty surface-level analysis. You can’t simultaneously bash surprise maintenance issues, and property management–one is insurance against the other. Also, property depreciation is not a negative feature of landlording; it’s an awesome tax benefit. Being a landlord with property that is bought well, with leverage and management, provides cash flow, property appreciation, tax benefits of depreciation (phantom income), and principal loan paydown by the tenant(s). You have the the inflation-hedge aspect of borrowing in today’s dollars and returning the same nominal amount in (likely) weaker dollars in the future. You can use the 1031 provision to indefinitely defer taxes on gain from sale; and you have the flexibility to take out equity tax-free in the form of debt without ever giving up control of the building. You also have the ability to do anything you want to improve the value and desirability of the property: paint it another color, add vending machines to the laundry room, put in carports. The list is endless! With REITs, you get a distribution of about 90% of the cash thrown off by the properties; but I think it’s treated like a cash dividend, with all the taxes that implies.
    What I would really like to know about RealtyShares is which benefits of real estate are available; and which are sacrificed. Obviously, you give up physical control of the property. (I get to decide whether or not to repave my parking lots, for instance; but I couldn’t do that with an investment through the site.) I guess I’d be giving up appreciation, with a debt position? Do investors who take an equity position get the tax benefits of depreciation? Can they write off a site visit to their properties, the way I can if I visit a property I own? Everything has trade offs; I’d be interested to know what they are in a syndication like this. Thanks!

  • GYM July 19, 2018, 10:14 am

    I’ve been interested in getting in on Realty Shares. Thanks for the post! I have been a landlord before and didn’t enjoy it ‘too’ much. I prefer a more hands-off approach so this is great.

  • Mr. Tako July 19, 2018, 11:26 am

    Great post. I’m primarily a passive investor, and have no interest in getting myself another job as a landlord. I prefer REITs over landlording. It’s far more passive and much less work for very similar returns.

    When I was a younger, I spent most of my free time working on my parent’s rentals so I have a pretty good idea of the work involved. It’s not easy and the returns aren’t that great.

  • Xrayvsn July 19, 2018, 11:28 am

    I have gone both routes and far prefer the passive real estate option. Yes there are some tradeoffs (obviously the company managing these assets has to have their cut) but I am ok with diminished returns compared to direct ownership if I don’t have to deal with day to day operations (I don’t want a 2nd job as a landlord).

    I had been investing in REITS which really are just real estate flavored stocks as you correctly pointed out since they track very closely to the overall stock market and don’t provide dramatic diversification.

    I did crowdfunding (Realtyshares) which I had good experience with but the holding terms were a bit short for me (and had to always find ways to re-deploy the returning capital).

    The past year I have been investing heavily with private syndication properties. The one I use in particular specializes in class B multifamily apartments. The big thing is you have to be comfortable with the syndicator as these are not well known (sort of spread by word of mouth). Once you find a syndicator you trust and has a same investing viewpoint as you I think it is a win-win (get to take advantage of all the tax benefits of real estate (depreciation) and have something that is not correlated with the stock market.

  • Dividend Portfolio July 19, 2018, 11:22 pm

    Good article and discussion so far. Like others have said, I have no interest in taking on a second job as a landlord. However, I do like owning residential real estate.

    I bought my first house almost 2 years ago and still have it. The first year, I lived in it and had roommates that helped pay for the mortgage. The next year, after I moved out, I rented the property using a property manager. I cash flow about $150 per month after fees. With the property manager, I just get an email about the big decisions. So far, I’ve gotten a request that the tenant wants to stay an extra month on her lease and also that there was a repair expense they needed approval on before they did the repairs.

    Owning the property with a good property manager isn’t entirely passive, but I promise you that the only time I really think about my property is the time of the month when I’m supposed to collect the rent check. Still, I do recognize that there are repair costs, turnover expenses, leaky roofs, etc that may come up, but I knew that going in.

    I look at my houses as a long-term investment. I charge $1500 for rent. If I buy 4 more houses that provide similar income, by the time they are all paid for (in 30 years, or maybe even around 15 years if I try and pay them off early), that will give me ‘passive’ income of about $90,000 minus a small amount of money for property management. It’s a simplified equation and the real valuation is much more complex, but I’m just pointing out that, that is one of the long-term benefits of real estate (assuming you find value in having so much equity in your house).

    I’ll stop here, as I don’t want this comment to be too long. But I will also say there is value in online real estate investment as well. I’m looking into Fundrise, which seems to be a great option and you don’t have to be an accredited investor, but you will have your money tied up with them for some time.

    Like I said, good article and discussion.

  • Joe July 20, 2018, 9:01 am

    I agree with most of Dave’s points. This is a very surface level article. I have self-managed properties, have properties that use property managers, and also invest in real estate passively through multiple avenues including RealtyShares. The most profitable deals by far have been owning rental properties myself. Why? Because you have full visibility and control. You get to decide when to buy a property, what to do with it, whom to rent it to, and when to sell for maximum tax benefits and profits. Maybe this is what turns some people off to rental real estate, but what can you make big money at without putting in some effort? I enjoy the analysis and the success, and of course the huge profits that so far I’ve been able to defer most of the taxes on, and I also have the option to simply pass on the tax-free capital gains through my estate.

    What I’ve lost money on is private group investments during the financial crisis and it’s looking like I am going to take a total loss on a RealtyShares investment that was poorly vetted. It’s my opinion only but I believe the largest financial motivation for RealtyShares is to increase deal volume, increase their own valuation, and then go public. Not necessarily to help you maximize your profits. How that affects their vetting process should be considered when you invest with them. After reviewing one of their failing deals, I am shocked at how it made it through their vetting process. And if you have to review in detail, why not buy your own deal and use project/property managers like they do?

  • Half Life Theory July 22, 2018, 10:07 am

    My biggest concern with online real estate investing is that it would end up underperforming the stock market…. in a similar fashion as my peer to peer investments have over the years.

    And what makes them even worse, is that they are typically held in taxable accounts…. So you will be taxed at your highest marginal tax rates on those minimal earnings. Too tough a pill to swallow for me

  • Elicia Smith July 28, 2018, 9:57 am

    This is a long-term business. There is no getting rich quick in rental real estate. In fact, you would probably be surprised how many properties it will take, especially subtracting the real costs to manage them and to replace your income.

  • zolar July 29, 2018, 8:55 am

    Aint easy to become landlord as there’s many hidden expenses we need to know..
    I’ve an experience and got some problem that you mentioned above.

  • David @iretiredyoung August 10, 2018, 4:05 pm

    An interesting article to get me thinking about the different options for having real estate in my portfolio – currently I have about 70% of my investments in residential property. Contrary to most of the comments, I’m a landlord and so far it’s worked out well for me. I do use a property manager which vastly reduces the hassle, although it does come at quite a large cost.

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