- Not all rental income can be considered passive.
- The job of a landlord means being on call, dealing with unexpected issues, and managing tenants.
- However, there are strategies that can reduce the workload, such as screening tenants.
If you google “passive income ideas,” one of the first strategies that pops up is to buy a rental property.
After years of speaking to real estate investors who own rentals, I’m not convinced the strategy can be considered passive. Tenant turnover, evictions, and fielding maintenance requests on Thanksgiving Day are just a few of the on-the-job responsibilities that have come up in conversations with landlords. Even those with property managers have described having to “manage the property manager.”
"People don't know that getting into the business really is work. It really is a job," New Hampshire-based investor Matt, who prefers not to share his last name for privacy reasons, told me when I asked about misconceptions about the job of a landlord.
Buying rental properties is "expensive like a puppy," he added. "You spend all of this money on a puppy, and you bring it home, and in the first six hours, it's peeing on your floor; right when you buy a property, within the next 24 to 48 hours, you're going to have an incident that's going to need addressing."
Granted, Matt self-manages over 100 long-term rental units.
Natia and Jervais Seegars, who own and self-manage a more reasonable portfolio of three short-term and two long-term rentals, believe that with the right systems in place and an attentive property manager, a landlord's job can be relatively hands-off. But there's a catch: Hiring a property manager isn't cheap. Plus, the moment you put someone else in charge, you lose a level of control over your properties.
They've learned that, "the more hands-on you are, the more money you're going to make," said Jervais.
Matt echoed that sentiment, pointing out that "no one wants to own the outcome more than the owner of a property. We're the ones that are most aligned with it becoming successful."
Matt, the Seegars, and Boston-based real estate investor Karina Mejia weighed in on how passive rental income really is, and shared the realities of being a landlord. BI verified all of their property ownership claims.
You're constantly 'on call'
If you choose to self-manage, "you're basically on call," said Matt. "It's an all-inclusive, all-encompassing job. Last night, my phone rang at 9:58. Somebody had dropped a bowl and broke the stove glass top."
Calls from tenants at odd hours and on holidays are a unique part of the job, he added: "Ninety percent of people aren't getting a call at 10 o'clock at night from someone that they do business with."
Expect the unexpected
To be a landlord is to be on your toes. As Matt put it, "I know what 70% of my week is going to be. The other 30% is a complete wild card."
Especially when you manage a large number of units, "you're forced to be a manager of chaos," he said. "A leaky pipe gets precedence over a broken cabinet door — seems fairly simple, but when you have two angry tenants because something isn't done, you have to choose the one that needs to be chosen, which is the leaky pipe. Water always wins because that can create the most damage."
Mejia, who owns six long-term rental units in Boston and six in Augusta, Georgia, has learned to overestimate her property maintenance costs.
"It's really important to consider capital expenditures or just repairs in general that will come up because they are unexpected and could be pretty expensive," she said. "And you don't have an option. You literally are responsible for the livelihood of another person. If their heat isn't working in the winter, you really need to address that immediately. If you're not prepared for those expenses, you might put yourself in a bad position."
Don't underestimate tenant management
Tenant turnover is part of the job and another reason to have strong reserves, said Mejia: "Vacancy completely kills the cash flow." In addition to finding a new tenant when one leaves, expect tenant management during the middle of a lease.
When one of Mejia's tenants complained about the smell of marijuana coming from the unit below (which Mejia also owned), she had to manage the situation.
"I had to have a talk with her about stopping that behavior, and it got to the point where I had to ask her to leave," said Mejia, at which point the situation escalated: "When I asked her to leave, it turns out there had been another person living in that unit without me knowing, without there being a sublease."
Not all property managers are created equal
Working with a property manager, whose role involves tasks like filling units and fielding maintenance calls, can help free up time and give your rental income more of a passive feel to it.
But who you hire "will make the world of a difference," said Mejia. There will always be an element of having to manage the manager, she added: "You still need to be on top of ensuring that the property manager is doing what they're supposed to be doing. At the end of the day, nobody's going to care about your properties the way that you do."
The Seegars, who have worked with a property manager in the past and now self-manage to "get all the juice out the berry," said Natia, emphasize the importance of asking specific questions before hiring anyone.
"Some states are unregulated in the property management world, meaning anybody who has no licensing whatsoever or even experience can come and say I can manage your property for you," said Natia. Especially if you live in an unregulated state, it's important to vet the property manager. "Ask how often they evaluate market trends; ask if they're equipped to handle evictions; find out how many additional properties they are managing. If they have 100 units, you should expect that yours isn't going to be managed that closely."
How to make rental income as passive as possible: Screen your tenants, buy new properties, build a strong team
While their short-term rentals require more attention, the Seegars estimate that they spend five to ten hours a year managing their two long-term rental properties. That's about as passive as it gets.
There are a couple of contributing factors. One, their long-term rental properties are newer, so they naturally have fewer maintenance requests and upkeep. Two, they have a team they trust and can call anytime, including handymen and an HVAC technician. Three, they vet their tenants in an effort to find responsible renters who they trust will not only take care of the place but be proactive in reaching out if issues arise.
That way, "we're solving problems before they become super-duper problems," said Natia. "If you're going to self manage, you need to have a good relationship with your tenant where you can communicate with them and check in on them."
Mejia says she'd rather have a lower rent with a solid tenant than higher rent with an unreliable tenant.
While she recognizes the various challenges that she and other landlords face, she hopes it doesn't deter potential investors from buying real estate. Ultimately, her real-estate investments allowed her to quit her corporate job in her 20s and start building generational wealth.
"I feel like sometimes people are resistant to buying investment properties because they think, 'Oh, I don't want to have to deal with tenants and all that.' It doesn't have to be as difficult as people imagine," she said. "You could find a really good handyman. Any time somebody has a management request, you can direct it to the person who's going to deal with it. If you're comfortable just making a call here and there, it doesn't have to be as scary as some people think — at least not scary enough to stop you from buying real estate."