Passive vs. Active Management in 2021
90 percent of the world’s billionaires have become rich through real estate investments. And now, as of 2020, millennials have entered the housing market with 45 percent of mortgages belonging to their generation.
As you begin to explore real estate investment, you’ll probably discover property management as well. Keep reading to learn about the differences between passive and active property management and the benefits of active property management.
What is Property Management?
Property management is defined as the supervision and oversight of a property conducted by a third-party contractor. These contractors, known as property managers, are paid a fee to oversee activities on the properties. The specific responsibilities are often regulated by the state. Here are examples of what any given property manager may be in charge of:
- General property maintenance (i.e., landscaping and snow removal)
- Daily repairs
- Rent collection
- Screening and selection of potential clients
- Drafting, signing, and renewing leases on landlords’ behalf
- Budgeting for property maintenance
- Scheduling property repairs
- Parcel and mailroom management
What is Active Property Management?
As the name suggests, active property management employs a more proactive approach. Typically, property owners who go this route are interested in receiving daily updates on their property. They seek out property managers who can meet their needs and provide consistent insight into their property. Thus, the property manager’s tasks shift to support and satisfy their desires. Here are some additional tasks for active property managers:
- Manage risks and minimize losses
- Maintain accurate market comparable rent prices
- Reduce average repair and eviction cost rates
- Actively market the property by communicating directly with applicants
With active property management, owners and property managers work more closely together for all decisions. While property managers still advertise the property and select tenants, the owner is aware of these steps and provided numerous details. These details may be communicated through various reports, price estimates, photos, etc. The two parties are in constant communication.
What is Passive Property Management?
Passive property management is a much more subtle approach to administration. The communication between property managers and owners is less frequent and involved. In fact, sometimes property managers and owners won’t even live in the same state/country. Because of this, they won’t provide daily updates or be as involved with management processes on the property. Here’s how the duties of a passive property manager compare to an active property manager.
- Collect rent
- Retain a client base
- Answer surface-level queries without going in-depth with the management process
- Select tenants and keep records without the constant supervision of the owner
- Make decisions regarding property repairs and maintenance without owner input
Passive property managers often have more control over the daily decisions, which frees owners of responsibility. However, this isn’t always desired and can lead to mistakes being made on the property manager’s part.
What are the Benefits of Active Property Management?
As you consider both the active and passive property management routes, you may wonder which is right for you. Overall, the US housing market is worth $33.6 trillion, and the property management industry generates $88.4 billion of annual revenue. Both are expected to grow. In the U.S. alone, there are more than 300,000 property management companies that employ over 367,000 workers (and this excludes self-employed managers). This market is enormous with real estate generating 16 percent of the national gross domestic product (GDP).
Now is the time to consider investing in property, and both active and property investment strategies have their own advantages when it comes to investment. Here’s what an active investment approach can offer you.
1. Quality over quantity
It’s no secret that active property management requires your time and attention. This means that you’ll be focused on managing one or two rental units rather than 10 to 15 because you’ll constantly be checking on them. Active properties require constant time and attention as they strive to benefit from short-term price fluctuations, which beat the stock market’s average returns. To do this, you need to be constantly aware of various factors, so you can determine the right time to buy or sell assets.
2. Investments remain close to home
Active investors will remain “boots on the ground.” While they can pass off some of the dirty work to their property manager, they’re still involved in a lot of the hard decision-making that comes with real estate investment. They must be ambitious and disciplined when it comes to seeking information and making decisions about the market(s) they invest in. As a result, it often makes the most sense for them to select properties that are close to where they’re located. This allows them to be more involved when necessary, versus passive property investors who could be located states away and having their property managers reigning over most decisions.
3. Higher risk, higher reward
Because active investments look to benefit from short-term price fluctuations, they tend to carry more substantial risks than passive investing. This is often difficult for inexperienced and unknowledgeable investors to get started with. If you’re new to real estate investing, you’ll probably have a lot of people recommend passive management until you have your feet under you. This way, the risk will be shared across multiple parties.
That said, if you’ve been in real estate investing for years, and you feel confident in your ability to calculate the anticipated cash flow, cap rate, internal rate of return, and cash-on-cash return, then you may be ready to reap the rewards of this strategy. Active property management certainly has its benefits. It just involves you being more hands-on to see that pay off. You have to ask yourself, “Am I ready to take on that responsibility?”
Real estate investing is all about generating additional income. Working with a property management company or individual is one way that you can ensure that you’ll make all your time and effort worth it. When choosing between active and passive property management, the decision comes down to how much time you want to invest each day in your company. Passive management is a much less proactive approach while active can have you in the weeds making some more difficult decisions.