Passive Investing Vs Landlording
Updated: Feb 27
If you're reading this, you know that real estate is an incredible investment vehicle. However, there are many different ways to invest in real estate; the most common is when an investor purchases a property and becomes a landlord. In some scenarios, being a landlord is good, but it's certainly not for most people. To figure out if you should be a landlord, you first need to determine your investing goals by asking yourself the following questions:
What am I trying to achieve?
Exactly how much is enough?
When do I want this?
After your goals are clear, you need to decide which strategy is best for you by asking yourself the following:
Do I want to create a career in real estate or invest on the side?
Do I want to build a portfolio myself or do I trust others to do it for me?
Do I want passive income or a side hustle?
What is my risk tolerance?
What is my timeline?
How much money can I invest?
Landlording is necessary if you are intending on building a portfolio yourself. An investor will need hands-on experience and must build a network of reliable contractors and subcontractors. You will also need to learn how to manage residents and finances. Being a landlord will save on costs compared to hiring third-party management, however, there is a learning curve, and it is a job. Everyone is different, some people enjoy being a landlord because it gives them full control over the property, residents, and outcome (for better or worse).
Landlording may be a bad idea if you want true passive income. Anyone that is in the resident management business knows that managing rentals is everything but passive. Even if a third-party manager is hired, you're still on call and make the final decisions. Being a landlord is also a bad idea if you earn a high income from your day job. In that case, your time is better spent working in your career instead of being a landlord.
Learning and managing residents is also not a simple or easy task. If someone is looking for easy money, this is not it. Building a portfolio yourself takes time, and evaluating your timeline is critical. Building a substantial portfolio from scratch can take 5-10 years or more. However, building a portfolio yourself does reduce the barrier to entry with less capital needed than a syndication (depending on property size and financing terms), however, there may be a higher barrier when financing is involved due to lender requirements. Finally, being a landlord can be risky. Controlling property does come with legal duties that must be known and followed. A simple negligence lawsuit can cost a landlord their property and if not structured properly all their belongings.
Once you know how you want to invest (passive income or landlord) you can choose which niche of real estate investing to enter and the amount you should spend.
All in all, becoming a landlord is a big decision, and the only way to know if it's a good idea for you is to figure out what you're trying to achieve. For investors looking to build an empire hands-on, learn the ins and outs, build relationships, and make a career out of their portfolio, we recommend you do just that.
However, if you want to invest in real estate because you know it can provide great returns and generational wealth, but you don't want to be a landlord, we recommend you consider becoming a passive investor. A passive investor receives all the benefits of investing in real estate, without being the landlord. Benefits include reducing tax liability from your day job and other investments, consistent cash flow, appreciation (natural and forced), equity pay down, and reduced risk. Passive investors simply invest their capital into an apartment community and receive distributions. The team handles the rest.
So, you want to invest in real estate? What do you want to achieve?