Why is passive property investing the entry point for investing in real estate and is supported by financial institutions, educational services and the real estate industry as the proven, accepted solution?
Limitations of Passive Real Estate Investing
A common situation is when a home owner becomes a property investor by purchasing or building a new family home and keeping the older house as rental property. The new home often is financed while the old house is mortgage free. That has financial implications because the new house with a new home loan is not rent deductible.
Moreover, owning a rental for saving towards a “nest egg” creates work and legal obligations (Residential Tenancy Act, Taxation law, Council regulations). That is why most newcomers prefer to share the rental income with an agent, who takes the role as landlord and professional services like a tax agent, accountant, etc.
In a similar way most people enter the property investment world through the window of passive investing. That is supported by financial institutions, educational services and the real estate industry as the proven, accepted solution – because that creates their source of income.
Passive investment strategies
Most (if not all) investors who only own few investment properties fall into the passive investor category. Passive investment strategies are good for people with busy lives, career people, and people with no hands-on interests. Those investors delegate their responsibility and authority to engaged agents such as property managers and experts like financial planners, accountants, tax and legal advisers. Passive investors rely on “the experts”.
However consider, if you can’t make investing a top priority despite its financial importance and typically rely on other people’s expertise, how could you gain knowledge and skills to get the most out of your investment strategy and avoid negative consequences?
The consequences are being not in control over your property investments and taking a lot more risks by expecting lower returns when riding the market roller coaster up and down. The most important “skill component” for adding value to your investment strategy and properties is missing. Trusting blindly the “experts”, making it the right course of action for you, is a common problem.
However, if the simplicity of passive investing is the right strategy for you that is better than not investing at all.
· Agents take on the responsibilities as landlord under the Tenancies Act but be aware that the property owner is still liable. So read before signing any agent agreements the disclaimer of the contract.
· As investor, I would also make sure being on the tenancy agreement parallel with the agent to take control if something goes wrong. That helps to avoid headache when the agent is in default.
· The yields for residential property investments are low. So it is understandable that passive investors tend to choose their property manager on price. Check the services firstly as the costs for a bad property manager can be substantial because of vacancy rates, interior/exterior damage to rentals and excessive repair bills.
Looking at the diversity of the residential property market you may struggle to build as passive investor a property portfolio as your income from your day job is limited.
There are reasons that the majority of property investors fail to own more than two investment properties. Around 20% of those who get involved in property investment sell up in the first year and nearly the half of passive investors sell their rental property during the first 5 years.
Most of what you can learn from the information available in your local bookstore or on the internet is the conventional wisdom of passive investment strategies. Here lives the retail world of real estate investing. To overcome the limitations of passive investing the next blog post illustrates how to use active investment strategies. Good luck.
Investor’s & Landlord’s Blog
Investor’s & Landlord’s Luck and Failure
Klauster Blogs lead to a real person who worked as computer network architect for many years in different countries until retiring from IT and mastering a life as property investor and landlord.
The passion of sharing experiences comes from turning hobbies into income streams and business. Helping people to avoid pitfalls and to be free to choose has been satisfying and most rewarding.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in our circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
Come along and participate — boost your confidence!