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.
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:
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:
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.
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.
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.
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.
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.
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.
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.
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