The Difference Between Active and Passive Real Estate investing

Starting the journey of real estate investing can be an intimidating task for many people.

There are a plethora of options, risks, strategies, and things to learn that any one person may not even know where to start.

One of the first things that must be considered, however, is whether your investments are going to be active investments or passive investments.

In this guide, we will be discussing the differences between the two real estate investing strategies, as well as the advantages and disadvantages of each.

Before beginning to compare them, let’s make sure we know exactly what each one is.

What Is Active Real Estate Investing?

Active real estate investing is a form of investing that is much more hands-on and involved. This means that the investor is fully involved in their real estate investments. The role of an active investor typically involves a large amount of analysis, research, and expertise in order to succeed.

Active real estate investors are also completely responsible for their portfolios. This means that they are the ones who consider the risks and rewards for each one of their investments. Thus, the general goal of an active real estate investor is to consistently be right about the best times to buy and sell and make a profit out of it.

Below, we have provided some examples of things that active investing may consist of.

Examples

Most of the work involved with active real estate investing has to do with buying, selling, or renting properties. A very common real estate investment is known as a fix-and-flip. This is when an investor buys a property and then later fixes it up to sell for a profit. These investments can be very risky and involve a lot of time and money to do.

Another form of active investing is renting out a property. This consists of purchasing a property and turning it into a rental property by renting it out to someone else. Doing this creates a great source of passive income that can even cover the property’s mortgage until it is fully paid off. Once the rental properties are paid off, the investor is free to either sell them or move into them themselves.

What Is Passive Real Estate Investing?

Passive real estate investing is similar to its active counterpart, except with much less involvement and effort. These investments are typically less expensive than active ones but also have lesser returns.

Passive investing is commonly used for the long term, like saving for retirement or for a college fund. For this reason, passive real estate investments are more like buy-and-hold investments. This means that you invest, and you keep that investment for many years until you want it back.

Examples

Most passive investments consist of real estate funds, crowdfunding opportunities, or a real estate investment trust. All of these require the investor to invest at least a small amount of money and wait some time before getting a return. By investing with these methods, you are not building any sort of real estate portfolio. Instead, you are basically investing in someone else’s portfolio, hoping that they make a profit and you do too.

So, as you can see, a passive real estate investment is much different than active real estate investments. But what exactly are those differences?

Below, we have outlined some of the most notable differences between the two investments.

Key Differences Between Active And Passive Real Estate Investing

We have already seen that both kinds of investing are pretty different. But it’s always good to know exactly what those differences are. In this section, we have covered the differences in the two investing styles for some of the most important areas, which are:

• The amount of work needed
• The experience required
• How much income is earned
• The liquidity of the assets

Without further ado, let’s get into the comparisons.

Work Done

First off, we are going to compare the amount of work needed for each. Active investing requires an immense amount of work and can typically be considered a full-time job. Especially for those investing in residential and commercial real estate, there are so many different factors and things to do that investors won’t have time for anything else.

On the other hand, passive investors do not require as much work. Participating in a real estate fund or crowdfunding opportunity can be as easy as going on your phone and putting in some money. Obviously, passive investors should do some research and invest their money where they believe they will make a profit. However, the research is minimal and the risk is also minimal as they can usually take the money out whenever they want.

When investors can get their investments back easily, or whenever they want, the investment is known as a liquid investment. Liquidity is extremely important when investing, and will be discussed later.

Experience Required

Another very important factor to consider when comparing the two investing styles is the amount of experience that is required. Since passive investment is as easy as going online and searching for potential funds, it does not require that much experience. A few days of research, or even hours, can bring you to some long-term, profitable investments.

On the other hand, active investments require much more time, effort, and most importantly, expertise. Active investors must be well versed in timing the markets to know when to buy and when to sell. They must also be able to tell which properties have a potential for profit and which ones don’t. Without these skills, investors risk losing a lot of time and money on their investments.

Income

For some people, the deciding factor between the two investment strategies is income. When determining income, it is vital that you also consider the risk involved as well as the time. For example, a passive investor may make a fraction of what an active investor makes in a year, but they did not have nearly as much risk.

Generally speaking, this is the case when it comes to comparing both incomes. Active real estate investors acquire their own income-producing real estate and keep all the profits. This can net them anywhere from a few thousand dollars to millions of dollars a year. On the other hand, passive investors make that amount simply by waiting long enough and not risking their greatest assets – their money.

Liquidity

As mentioned before, liquidity is the ability of an asset to be liquidated, or sold, back to the market. Most real estate investments, like residential or commercial properties, are known as illiquid assets. This is because selling properties is not necessarily easy, and can take months.

In contrast, most passive investments are easy to convert to liquidate because they are still in the form of cash. For most investments, an investor can take out his money whenever they want to. The only downside to this is that certain investments may charge a fee for taking out investments early.

So now that we know all about some of the key differences between active and passive real estate investing, let’s go over the advantages and disadvantages of each one.

The Pros And Cons Of Active Real Estate Investing

First, we’re going to be going over the pros and cons of active real estate investing. Let’s get right into it.

Pros

Flexibility

One advantage of being an active real estate investor is that you can be more flexible with your investments. Since an active investor is the sole manager of their investments they can buy and sell at their own command instead of following a specific index. This can come as a great advantage, especially for those who have higher expertise in the area.

More Control

Just as discussed in the previous point, active investors have way more control over their investments than passive investors. Since passive investors are investing in the ideas of other people, they may miss out on opportunities that are even more profitable.

However, this added control also means added risk if the investor is not knowledgeable. Passive investors only risk losing a portion of their assets when they invest, but active investors can risk losing a ton more since they are solely responsible for their investments.

Tax Benefits

Active real estate investors can also take advantage of some pretty neat tax benefits. One of the most beneficial tax benefits is the ability to deduct expenses. These expenses must be tied to the real estate investment, and can include:

• Property taxes
• Maintenance
• Interest
• Property management fees
• Office space

…and anything else that counts as a business expense.

Cons

The advantages of active investing seem nice, but there are always drawbacks.

Higher Risk

One of the obvious risks of investing actively is that the investor will face a higher risk. Since they are investing their own money into their own intuition, they are risking losing all of it. And, unfortunately, it is not easy to get back, depending on how severe the investment was.

But, as everyone knows, with high risk comes high reward. It is very nice when the analysis is correct, but when it’s not correct, it can be very, very bad.

More Expenses

Another disadvantage of active investing is that it is more expensive than passive investing. These expenses come in the form of transaction fees, paying analysts for advice on investments, and other fees.

Although they may not seem like much at first glance, these expenses can build up over the years and completely kill your returns. That is why it is essential to stay on top of expenses and make sure they do not get out of control.

The Pros And Cons Of Passive Real Estate Investing

So, now that we have discussed all the pros and cons of active investing, let’s go over the same for passive real estate investing.

Pros

Very Cheap To Start

One of the best advantages of passive investing is that it is really cheap to start. Since the only fees that a passive investor will pay are a couple of transaction fees when they want to invest more money, the expenses do not pile up as much.

Also, the minimum investments for many funds and indices are usually not too high. This means that investors can get started with only a few hundred dollars in their bank account.

Lower Taxes

Another advantage of going with passive investments is that there are fewer taxes. This is because there is less income. With the buy-and-hold strategy, the capital gains every year is very low. This means that the taxable income from these investments won’t be as much compared to that of active investors.

Cons

Very Limited

One of the disadvantages of passive investing is that the investor is very limited in what they invest in. For example, when investing in an index or fund, the investor does not choose which assets are being invested in. They are only choosing the collection of predetermined investments that they hope will yield them a profit.

Small Returns

Passive investors also suffer from smaller returns compared to active investors. Obviously, this is because there is much less risk and skill involved in passive investing. However, these small returns add up over the years. Countless investors put a small amount of money every month into their investments and grow to large sums of money by the time they retire.

Which One Is Right For You?

Although we know are able to differentiate between active and passive investing, and know the advantages and disadvantages of each one, we still haven’t answered the most important question – which one is right for you?

That question can be answered by asking yourself a set of questions. These questions are:

• How much risk are you willing to take?
• What level of control do you want?
• How much expertise and skill do you have?
• How much time can you dedicate to investing?

These guiding questions are sure to help get you to the answer that you desire. Just make sure to consider all the factors in your life before making any decision

Source

Looking for rental services in Orlando – we can help.

We work with our Owners and tenants as individuals and never under estimate what it takes to keep you happy with your choice of Management Company.

By doing our due diligence with our clients, tenants, and vendors we create a service that exceeds expectations and generates positive referrals. Click HERE to learn more and how one of our property management professionals can help you!

Short-Term Lease vs. Long-Term Lease

Every landlord needs a lease agreement that clearly outlines the responsibilities and protections of both parties. Lease agreements ensure that everyone is aware of the expectations set during the lease term — especially your tenants.

However, there are different lease term durations a landlord can offer, such as a short-term lease or long-term lease. Both have their pros and cons, so you’ll want to know which one makes the most sense for your rental property.

Keep reading to learn more about how both types of lease agreements differ and when to offer short-term lease agreements to tenants.

What’s the Difference Between Short-Term Leases and Long-Term Leases?

A short-term lease agreement lasts anywhere from three to six months, or can go month-to-month until the tenant decides to move out. Long-term leases are anything longer than six months and can go up to 15 months before needing to make a new lease.

Long-term leases are usually preferred by landlords since they guarantee a longer stream of rent payments, but the lease term duration can vary depending on the goals you’re trying to achieve.

Is It Better to Lease Short-Term or Long-Term?

If you’re looking to establish a longer stream of income through rent payments, then long-term leases may be more suitable for your rental. Short-term leases can be beneficial if you’re looking to sell your property soon, want more flexibility in adjusting the rent price, or plan on not living in the property for three to six months.

During the summer months, there may also be a higher demand for short-term rentals due to tenants seeking temporary housing in new cities for job opportunities or summer classes.

When to Offer Apartment Short-Term Leases

There are certain instances where offering an apartment short-term lease makes the most sense. Here are different types of tenants that may benefit from a short-term lease:

• Relocating for a job: Some tenants may have had to move to a different area in a short amount of time for a new job. This can result in them needing temporary housing until they purchase a new home or find a long-term apartment.
• Renovating a primary property: If homeowners are currently in the process of renovating their home, they may need temporary housing for a period of time until the house is complete.
• Overseas travelers with a short-term visa: Short-term visas are typically active for a maximum of 90 days, which means they’ll need to move again if they’re unable to stay longer.
• Temporarily visiting the area: With more companies offering fully remote positions, more people have been visiting new areas for short amounts of time. Offering a short-term lease can allow visitors from different cities to rent out your property until they decide to go somewhere else.

Looking for rental services in Orlando – we can help.

We work with our Owners and tenants as individuals and never under estimate what it takes to keep you happy with your choice of Management Company.

By doing our due diligence with our clients, tenants, and vendors we create a service that exceeds expectations and generates positive referrals. Click HERE to learn more and how one of our property management professionals can help you!

Normal Wear and Tear vs Excessive Tenant Damages

“Normal wear and tear” is one of those landlord-tenant law phrases that is subjectively difficult to define. It’s one of the leading contributors to security deposit disputes purely because of how vague it is.

Most states have individual versions of this law, each with different wording. This is an issue for you as a landlord. However, the general premise stays the same from state to state. Tenant damage is separated from normal wear and tear by implying the property damage resulted from negligence, abuse, or carelessness.

Of course, what constitutes these phrases differs from person to person. A person with severe OCD likely has a different definition of negligence and deterioration than someone else who is messy. The difference between normal wear and tear versus damages beyond normal wear is blurred at the best of times, and that presents a problem for your investment property.

With all of this being said, it is possible. So, how do you define normal wear and tear vs. excessive tenant damages for your rental real estate property?

Normal Wear and Tear vs. Tenant Damage

The Department of Housing and Urban Development has excellent documentation for defining what is and isn’t normal wear and tear.

Normal Wear & Tear Examples

According to the definitions laid out in the document, normal wear and tear constitute the following examples:

• Ripped or faded wallpaper.
• Peeling, faded, or cracked paint, including ceiling paint.
• Holes in the wall, including nail holes and pins.
• Cracks in the walls.
• Cabinet doors sticking.
• Hardwood floors in need of a coat of varnish.
• Loose grouting or tiles.
• Damaged window pane as a result of faulty foundations.
• Thin and faded carpet.
• Rusty shower rod.
• Lightly damaged enamel in the bathroom.
• Dirty or faded lamps and window shades.
• Clogged sinks resulting from old plumbing.

Excessive Wear & Tear Examples

If a tenant caused damage, the tenant must pay to replace or repair the damage as opposed to normal wear and tear. Examples of negligence on the tenant’s behalf include:

• Crayon markings, drawings, different paint colors, or wallpaper not approved by the landlord.
• Holes in the walls or plasterboard.
• Gouged or chipped hardwood flooring.
• Heavily damaged or ruined wallpaper.
• Broken windows.
• Doors ripped off of the hinges.
• Missing fixtures.
• Holes, stains, burns, or other damage to the carpets.
• Holes in the ceiling.
• Missing or cracked bathroom tiles.
• Clogged or damaged toilet from improper use.
• Damaged sink and bathtub, including chipped or broken enamel.
• Torn, stained, or missing lamps and window shades.
• Missing or bent shower rods.

Useful Life Expectancy

The documentation also lays out the useful life expectancy of various appliances proportional to the tenant’s age. Examples of this are:

• Hot water heaters – 10 years – All units.
• Air conditioning units – 10 years – All units.
• Refrigerators – 10 years – All units.
• Ranges – 20 years – All units.
• Plush carpeting – 5 years for family / 7 years for the elderly.
• Interior enamel painting – 5 years for family / 7 years for the elderly.
• Interior flat painting – 3 years for family / 5 years for the elderly.
• Tiles or linoleum – 5 years for family / 7 years for the elderly.
• Window shades, screens, and blinds – 3 years for family and the elderly.

Excessive Damage Repairs vs. Routine Maintenance

As the landlord, you have a responsibility to maintain the premises. This includes the standard turnover checklist between tenants. You usually cannot charge the tenant for this.

Cleaning

As the landlord, you must have the premises professionally cleaned when in-between tenants. Professional cleaning involves outsourcing the job to a certified cleaning company and cannot be done by yourself without the relevant qualifications. Outsourcing like this will ensure that the property is in pristine condition for the next tenant and allow you, as the landlord, to more clearly define normal wear and tear.

Being a landlord, you cannot bill your tenant for the regular cost of this cleaning. However, if the tenant never cleaned the unit during their time there, you may be charged extra by the cleaning company. This extra charge is a result of the tenant’s negligence and can be forwarded to them.

If you expect that your tenant will clean before they move out, be sure to include it on your lease agreements.

Carpet Cleaning

You do not need to outsource your carpet cleaning to a professional. You are free to do it yourself. You cannot charge your tenant for this kind of cleaning unless the carpet is excessively damaged. However, it would help if you suggested that your tenant cleans the carpet themselves before they move out. Keep in mind that if there is no significant damage to the carpet, they are not required to give it a deep clean.

If the carpet is damaged so severely that the tenant can’t clean it, there is something you can do. You can charge your tenant for the remaining life expectancy of the carpet. You cannot charge for a full replacement unless you can prove the carpet was brand new as carpets deteriorate naturally over time.

Carpet damage is a bit of a grey area when it comes to property deterioration. You will need to determine if it’s normal VS excessive wear and tear. Carpets are typically a very sore spot for a lot of landlords. It’s easy to damage one, and very hard to clean it. In the future, you might consider getting vinyl floors instead.

Paint

If you recently painted the unit, but the walls were filthy, you might be able to charge for the repaint as this doesn’t fall under regular wear and tear. This would include things like an excessive build-up of dirt, painting, and drawings on the wall.

However, if the tenant has been living in the unit for three or more years, you cannot charge them for a repaint as it is considered routine maintenance, as long-term deterioration would be regarded as wear and tear.

Light Bulbs

Every light bulb should be working when a tenant moves into the unit. As such, it is expected of them that every light is operational when they move out. This means that they bear the responsibility of changing any light bulbs that burn out.

The Importance of Security Deposits

It is vital that you, the landlord or property manager, collect a security deposit before the tenant moves into the rental unit. This acts as a form of insurance against any damages.

It provides you with the means to cover any tenant damage caused by negligence, and it serves as motivation for the tenant to look after the premises.

Typically, the security deposit amount is one month’s rent. This should be given to you in tandem with the first month’s rent in advance.

If there is no property damage when the tenant leaves, the landlord cannot keep the security deposit and is legally required to return it to them. Failure to do so entitles the tenant to seek legal action against you.

Lease Agreement Clauses

Having a comprehensive lease agreement is vital for landlords. Not just for when it comes to normal wear and tear vs. property damage, but in general.

These lease clauses will legally protect you against a variety of situations that may be individual to the tenant renting the property.

For example, you should include pet clauses if the tenant is bringing one to the rental property.

Without the proper clauses in place, it will be much harder to use the security deposit for damages.

As well as distinct clauses covering the individual tenant, there are a few that you need to make sure you’re on all of your lease agreements regardless of who is going to be renting the property:

• How the moving in and moving out inspections are going to work.
• If the tenant is required to clean the carpet or repaint when the tenant moves.
• Exactly what type of cleaning should be done by them before leaving.
• What is considered normal wear and tear, and what is considered damage.
• The procedures if the landlord discovers damage after the old tenant has moved out.
• How the security deposit is going to work.

Videos and Photographs

Taking videos and photos of rental properties is considered routine by landlords and renters alike. It prevents both parties from fraudulent claims and is a crucial piece of evidence in a legal dispute.

Landlords and tenants should both video and photograph the rental property before any renters moving in. This allows both parties to document any pre-existing damage, the condition of appliances, the condition of wood floors and carpet, the quality of the paint job, plumbing fixtures, and a variety of other features.

It is essential for both you and any renters to be thorough with this process. Furniture, walls, flooring, skirting board, light fixtures, and everything in between should be included in the recording.

Both should also take photos of the features included in the video to back up the evidence.

Similarly, the same process should be repeated by both parties when the renters leave the rental unit.

The tenant should take photos and a video themselves right before they finish moving out. This allows them to document the exact condition that they left the property in.

Once you inspect the property after the tenant has left, you should take photos and videos yourself. This way, there is clear documentation of the unit’s state at both ends of the tenant’s stay.

It allows officials to get a clear picture of the unit’s damage and deterioration, rather than just hearing testimony from the landlord or tenant.

A court judge will define normal wear and tear specifically for that situation, and that ruling is final unless you want to appeal it.

The Importance of Tenant Screening

Before landlords think about wear and tear, rent collection, security deposits, or anything in between, they need to screen their tenants.

This typically involves meeting the tenant for a tour of the property. It allows you, as a landlord, to get a feel for the other person’s personality. It’s an informal interview that gives you subtle clues as to whether or not you want that tenant living in your property.

Things like how they’re dressed and keep themselves, their manners, and how they conduct themselves can be significant indicators of whether they can be trusted with the property.

You should not let any personal bias or discrimination factor into your decision. You cannot base your decision to rent a property to a new tenant based on race, age, sexual orientation, gender, religion, ethnic origin, physical or mental disabilities, or family status. You also cannot refuse to rent a property based on the tenant having kids.

It’s not unusual for landlords to be wary of renting to the likes of young people, but don’t let that hesitation cloud the reading you get from the screening.

If you are found to be refusing rent based on one of the criteria above, then you might end up in legal trouble.

Screening should be done exclusively to determine how much wear and tear vs. damage a landlord needs to be concerned about.

The Last Note

As a last note on normal wear and tear vs. damage, try and keep a clear image in your head of the difference between the two.

While understanding what is considered normal versus damage is essential, you also need to recognize the impact of normal depreciation. The value and condition of appliances decrease over time. You cannot charge a tenant on grounds based on that.

Faded paint doesn’t warrant a replacement cost taken from the tenant’s security deposit.

It’s situations like this that put so much value into your lease clauses, though.

When you are drafting up your agreement, remember to be comprehensive but reasonable. If you want the tenant to repaint the walls, that’s acceptable, but don’t ask that automatically of tenants renting your unit for six months.

Understanding how to tell the difference between damages and wear and tear is just the tip of the iceberg for a real estate landlord.

We hope this guide will be useful for you going forward.

 

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Looking for rental services in Orlando – we can help.

We work with our Owners and tenants as individuals and never under estimate what it takes to keep you happy with your choice of Management Company.

By doing our due diligence with our clients, tenants, and vendors we create a service that exceeds expectations and generates positive referrals. Click HERE to learn more and how one of our property management professionals can help you!

 

How Much Profit Should You Make on a Rental Property?

The objective of a rental property business is to generate gross monthly income that can help cover operating expenses and result in profits. But in order to achieve this, you’ll first need to determine how much profit you should make on a rental property based on the goals of your business.

In this article, we walk you through the steps of calculating profits from a rental property and the top considerations to keep in mind.

How to Calculate Profit From a Rental Property

One of the benefits of investing in real estate is the ability to make passive income. However, generated income is not the same as profits, since operating expenses will need to be subtracted. To help you calculate the profit from your rental property, here are three steps to follow.

1. Forecast Rental Property-Related Expenses

Just like any other business, there will be operating expenses that will need to be covered monthly. Generally, costs you can expect to deal with are:

• A mortgage payment and property taxes: This expense varies depending on which financing method you used to purchase your rental property.
• Maintenance repairs: Older rental properties may require more maintenance than newer properties.
• Apartment turnover expenses: You will need to turnover an apartment whenever a tenant decides not to renew their lease agreement. This requires you to advertise your rental online, require tenant screening reports from applicants, create a new lease agreement, and prepare the property for the next tenant.
• Landlord insurance: Landlord insurance is highly encouraged to ensure your property is protected when rented out to tenants. The amount of protection your policy offers will influence your monthly cost.

Once determining the total amount of expenses you will need to cover, this can then be taken into account when setting a rent price.

2. Determine Your Set Rent Price

There are a few factors to consider when determining how much to charge for rent. Here are the main four to keep in mind when determining a rent price.

1. Seasonality: You’re able to charge more for rent when the local demand for rentals is high. On the other hand, low demand makes it difficult to charge a higher rent price.
2. The value of your amenities: Certain apartment amenities can increase the value of your rental property. If your unit offers in-unit laundry or stainless steel appliances, then this allows you to charge more than units that do not offer those amenities.
3. Consider current events: There may be instances where current events could be impacting the operations of your rental business. Whether that’s changing landlord-tenant laws or tenants unable to pay rent due to the pandemic, you should consider what’s happening in the rental industry when setting a rent price.
4. Operating expenses: Your rent price should help cover monthly operating expenses, while still considering local rent comps to avoid overcharging.

How Do I Know If My Rental Property Profits Are Good?

Determining whether or not the profits from your rental business are good will depend on the goals you’re hoping to achieve. Although some landlords approach any profit as good profit, that may not be the case for everyone.

Creating a rental property business plan can be one way to help you establish what good profits look like and determine how much you hope to make in profits at the end of the year. Setting a goal towards rental profits will give you a benchmark to help you determine if profits you’ve made so far are good or bad.

 

Looking for rental services in Orlando – we can help.

We work with our Owners and tenants as individuals and never under estimate what it takes to keep you happy with your choice of Management Company.

By doing our due diligence with our clients, tenants, and vendors we create a service that exceeds expectations and generates positive referrals. Click HERE to learn more and how one of our property management professionals can help you!