Is it actually “passive income” if you manage your own rental properties?
Of course not, but that doesn’t mean it’s necessarily a bad idea to do so. For some, managing real estate is a hobby or a second job, and there’s nothing wrong with that. Dr. Cory S. Fawcett managed dozens of units himself as a general surgeon, and he’s got lots of tips for those who’d like to do the same.
Dr. Peter Kim, an anesthesiologist and the author of today’s post, has previously written about how much time it takes to manage your own properties. Today, he addresses whether or not you should consider doing so.
This post originally appeared on Passive Income MD.
Should You Manage Your Own Rental Properties?
When it comes to income, the term “passive” exists on a sliding scale. Very few things are truly passive (meaning you put in zero work and receive income in return).
Take, for example, one of my favorite subjects: producing income from owning rental properties. The IRS considers this income to be “passive,” but in reality, there are plenty of day-to-day tasks that need to be performed to make sure the property is performing well.
Some of those tasks include, but aren’t limited to:
- Collecting rent
- Advertising and marketing vacancies
- Screening tenants and showing the property to potential renters
- Making sure lease agreements are signed correctly and collecting safety deposits
- Making sure the property is in compliance with local and national standards
- Handling maintenance requests
- Working with vendors to make sure work is scheduled and completed
- Paying vendors
- Paying utilities
The extent to which these things need performed depends on how many units or apartments are in the building. You may need to do only a few of these things on a monthly basis – or you may need to do them all on a daily basis.
When you look at all the responsibilities laid out like this, the next logical question becomes this: should you manage your own rental properties?
If the answer is no, then you’ll likely be in the market for a property manager of some kind. This process isn’t necessarily easy, and despite the extra work involved, there is something to be said for managing the property yourself.
As with nearly everything, there’s no one perfect answer for all scenarios. Because of this, I thought it’d be good to take a deeper dive into this question. In regards to property managers, Shakespeare said it best: “to hire or not to hire?” (Slight paraphrase.)
If you’re wondering the same, there are some key questions to ask yourself.
Do you have the time?
All of the tasks I mentioned above aren’t necessarily difficult – on their own. They become really problematic when they start to stack up. Imagine spending days trying to fix up a unit while marketing and showing the same unit to potential renters. Then multiply that by twenty or thirty units.
I mean, if it’s your full-time job and you have the time to dedicate to it, that’s one thing. However, if you’re a physician who is already stretched at work, and you already don’t spend as much time with your family as you want…well, imagine throwing this job on top of it.
And make no mistake, it is another job. That’s why there are professional companies that handle it.
So, you have to really ask yourself: how much free time do you have to devote to it?
One of my own properties is a condo that my wife and I lived in during our residency. It’s a one-bedroom condo in good condition and in a great part of town. Competition for renting out that apartment has been pretty fierce, so we’ve had the luxury of being able to pick-and-choose amazing tenants.
This has allowed us to be able to manage this property ourselves; I almost always get paid on time, and maintenance issues are few and far between.
Then there’s the six-unit property I own on the other side of town. It’s not bad by any means, but it’s an older building, so despite recent renovations, plumbing and electrical issues arise fairly often.
With this property, I felt I didn’t have the time to deal with the tenants and the building issues, so I hired a property manager. It all had to do with how much time I felt I would have to devote to it.
Do you have the expertise?
As we know, there are plenty of tasks involved in making sure the building is and continues to be a good investment. To get these tasks done right, you need to know how to deal with multiple issues that might arise. Not just in maintenance, either – you’ll be dealing with vendors, tenants, and even local government, depending on what the issues are.
Partly due to this, the same property, managed by two different parties, can end up with completely different financials at the end of the year. It’s like any other business. The person making the decisions is the one who makes sure you’re keeping your tenants happy and safe, and of course, driving increased income.
Do you have that expertise? If not, or if you’d like more (never a bad idea), a good route is simply by reading books, articles, and hunting for other resources. And of course, experience is always a great teacher. Beyond the knowledge, though, you have to ask yourself if you’re willing and prepared to be in the trenches, learning while you’re doing it.
At this point, I’ve been around enough properties to know what property managers do. Most of the time, it’s not extremely complicated. But when it does get complicated, having someone who knows how to deal with that type of situation is vital.
Don’t even get me started about all the proper local, state, and federal guidelines required to make sure you’re in compliance with all regulations. If you’re not, there’s a real possibility that you get sued or that the county will shut you down.
Are you willing to keep up with all the current news and regulations to make sure you’re in total compliance?
How much is it to hire a property management and is it worth it?
I’ve found that for smaller properties, property managers will look to receive 8-10% of gross rents. As the property gets larger, you might see closer to 5% in management fees.
There will also be some additional fees around the time the property becomes vacant and you have to re-rent it. There might be showing fees and placement fees, which are quite common. Those fees are often some percentage of the first month’s rent (often around 50%).
As a side note: while you can bargain to the lowest possible level for all these management fees, you’d be removing a lot of incentive for the property management to do a good job and spend any real time or effort on your property.
It’s almost always best to pay enough to make sure they’re well compensated to do their job. If you’ve selected a good manager, after all, they usually have their fees set for good reason.
Do you live close to the property?
Being a good property manager means being able to get to the property quickly as issues arise. Certainly, there are some issues that can be done over the phone or with fancy online portals these days.
However, if there’s a large geographic barrier between you and the property, it becomes difficult to manage it. What if you have to pop over there for a major issue?
This directly relates to the time issue as well. Do you have time to occasionally check out the property in person, especially when immediate needs pop up?
Remember, time is money, so even that commute time is an opportunity cost; time you could be spending doing other things or with other people.
Can you afford the property management fee?
This question depends on how well the property is cash flowing without one. Ultimately, does hiring a property manager at 8% create a negative cash flow situation? If so, of course, it wouldn’t make sense to pay a property management fee.
Personally, I believe that if you’re a practicing physician, you should hire property management. Sure, there are exceptions, like the one-bedroom condo I own.
However, outside of that, I believe that your time is best spent elsewhere. Your time is extremely limited and worth quite a bit. It’s better to keep as much time free, so you can spend it how you want. In this case, spending time with your family on the weekend without the worry of having to answer phone calls about flooded toilets makes a lot of sense.
Your time is your most valuable asset. I say: be willing to invest in others (and other companies) to free up as much of it as possible.
In fact, I’ve learned not to look at property management as an optional expense. When doing my due diligence on a potential real estate investment, I cook it into the numbers. Essentially, when I calculate my assumptions, I add in the 5-10% property management fee.
How do you know if you’re hiring a good property manager?
This one takes some experience. While there are some traits that I look for in a property manager, I think the next best thing to firsthand experience are referrals from others you know.
Why not leverage their experience in dealing with the property managers. If they’re being treated well or the investment is doing great, people are happy to share their resources. You simply need to ask.
In any case, when you’re researching property managers, be conscientious when looking at statements. Don’t be afraid to fully vet and do the proper due diligence.
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Ultimately, while I believe that hiring a property manager is the way to go, it’s all up to you. Ask yourself these questions, and determine what works best for your situation.
The thing is, real estate can be relatively passive. It often just requires a lot more due diligence up front to make sure you’re purchasing the right property or hiring the right staff.
If you do it right, you can enjoy all the great benefits that owning rental properties has to offer – without having to give up time to achieve them.
How Much Time Does It Take To Manage Your Own Rental Properties?
Physicians are busy people. Simply juggling work and family can be tricky enough, but when you add business ventures and investments, it can seem nearly impossible to do it all.
I’m often asked how I balance being a physician and father, while still having time to run and manage a real estate portfolio.
In fact, I think time (thinking there’s not enough of it) is the main reason more physicians don’t build or manage real estate portfolios of their own.
It’s understandable; you don’t want to get called in the middle of the night with plumbing issues. You hesitate at the idea of tenant issues adding stress onto your already stressful lives.
While it’s true that there are hassles in owning real estate and having tenants, there are ways to make sure that hassle is limited. Owning your own investment property doesn’t have to take over all of your free time.
It Really Is Possible
For proof that there are physicians making it work, I recently took a survey in our Facebook Group to ask how many people made their first investment within the past year. The response was amazing.
So many physicians made their first rental property investments quite recently. Many followed that up with a second or third investment–all within the same year.
If one property took that much time manage, wouldn’t a second property double it and a third triple it?
How are people able to manage that?
Well, using myself as an example, I have six different rental properties in three states that I need to “manage.” Some are small, single-family properties, while others are small apartment buildings.
However, without exaggerating, I can tell you that I spend on average a total of 3-5 hours per month in dealing with these properties.
How is that possible? How do I manage my own properties?
It’s simple, really. I don’t… I hire good property management and I manage them.
What Does Property Management Do?
Well, simply put, they manage all the day-to-day stuff. They collect rents, manage repairs, maintenance and upkeep, they handle paying all the bills and expenses.
My mortgage, insurance, and taxes are set up to all pay through my lender. Some say it’s better to pay these things on your own so you control the flow of money, but that’s another hassle factor and to me, it’s not worth the potential gain.
Once, I actually forgot to pay one of the property taxes on time and the fee was extremely high. I realized I was looking only at the gain and wasn’t looking at the potential loss as well of paying my own tax bill. So when I factored that all in, I just decided it was easier to let the bank handle that.
Every month, I receive a statement of the month’s income and expenses from my various property managers. I also have things set up for direct deposit into my bank account.
I review each statement really quickly–between all the properties, it takes less than thirty minutes in total. I don’t pick at every single detail; I look for any abnormal costs.
My property managers all have it in their contracts that if the cost is above a certain amount and it’s a larger repair, they will contact me to let me know.
That usually comes in the form of a quick email or a message in one of my portals, that might look something like this:
I might ask a follow-up to see if they’ve gotten a second opinion, but oftentimes I just go with their recommendation. Again, I spent time on the front end to make sure I’m dealing with a trustworthy, intelligent, and experienced company. I hired them so that I don’t have to look at all the little details.
I’ll authorize a repair and just wait for a confirmation that it’s been done.
Then I might get a message like this one:
With something like this, I’ll shoot a quick message asking for some more details about the tenant payment history. Has it always been on time? Have there been any other issues with the tenant? Then, ultimately, I’ll ask for their recommendation.
In this case, the tenant had several late payments, so I asked them about how the rental market in that area was doing, the market rent, and how quickly they think they could re-lease it. They said it was a very hot market, and market rents were higher. So, I decided it was better to end this relationship and to find a more responsible tenant.
When looking over statements at the beginning of each month, I might see things like plumbers and electricians having to go out and do repairs at different properties. But all those happened without me having to manage it and I was free to focus on other things!
But Doesn’t This All Cost Money?
Typical property management is anywhere from 6-10% depending on the size of the property (ie: how many units). I consider this the expense of doing business. It’s overhead just like anything else.
When you run a medical practice, rent and expenses are all a part of it. When you invest in a mutual fund, there are fees, hopefully very low, but you still have to consider them to figure out what your net return is.
I do the same thing for real estate by looking at returns net of property management and other expenses. You have to look at the overall returns and see if it makes sense within your investment goals and risk tolerance.
I also consider “time” as part of the equation. Sure, I could make more money if I didn’t have management. But it would take far more time, and my time is actually worth quite a bit more to me.
Since I believe my time is more than what I’m paying management, I feel like I’m leveraging them to attain even better returns.
So in summary, here’s how much time I actually spend on my investment properties every month:
- < 1 hour reviewing statements
- 1-2 hours making important decisions
- 1-2 hours on paperwork that might be needed, taxes, documentation, call with CPA
Now, the time spent any given month might occasionally stray outside the norm. That can depend on what stage the property is in.
If I’m looking to purchase a property, the vetting period is definitely more involved. It also requires a good deal more time to get paperwork sorted out.
If there are times when we’re doing heavy construction or renovating, I want to be a little more hands-on in knowing the progress of things.
But when the properties are stabilized, like they are now, it’s all very manageable.
You Can Make It Work
Time is a hot commodity, and I know how valuable it is. If you’ve thought about investing in real estate but haven’t made a move due to the perceived time commitment, just know that you can make it work however you want. You can enjoy your time and the returns you’ll receive.
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How much time do you spend managing your rental properties in a typical month?