This is the second edition to the Trisha Allen’s Guide to Real Estate Investing.
As a reference, the Active/Passive measure is a five star scale with one-star being the most active and five-stars being the most passive.
Congratulations, you’re a landlord! There are tenants to be found; leases to negotiate and sign; regular property maintenance issues and emergencies to be handled; possible evictions to be filed; then taxes and insurance to be paid. A property manager will charge a percentage of the monthly rents to perform many of these tasks. Finding a good property manager falls on your shoulders, however. Then, you’ll manage the property manager, receive the monthly rent, and verify the math on the monthly statements. The idea behind this type of investing is to benefit from cashflow (when a property produces profits above and beyond the mortgage payments, insurance, taxes, property management fees, repairs, HOA fees, and other expenses). Bare land can even be leased out for cashflow, although it doesn’t provide tax benefits like improved property. Overall, landlording’s not a bad gig when everything goes well!
Residential Rentals – Residential rentals can be single-family homes, mobile homes, duplexes, triplexes, or quadplexes. Anything larger is considered commercial where financing is concerned. Residential rentals tend to be predominantly the beginner’s choice investment type due to the affordability of the property and downpayment, the availability of financing, and abundance of educational resources.
Entrance Difficulty Level: Moderate
Commercial Rentals – Commercial rentals can be apartments with five units or more, shopping centers, retail, offices, industrial/warehouses, even mobile home parks. Believe it or not, commercial rentals tend to be more passive investments than residential rentals! Property managers are easier to find and manage. Your property may be the ONLY property they manage, or at least make up a significant portion of their inventory. Other professionals and vendors tend to find your business more valuable and may be willing to bend over backwards to keep you. Conversely, contractors may think you’re loaded since you own a big property, and may charge you exorbitant rates for upgrades and repairs. Of course, you can have your property manager collect multiple bids to keep costs low. It probably goes without saying that commercial properties tend to be much more expensive to purchase than residential. Also, “how-to” resources are much harder to find, which makes it sometimes necessary to rely strictly on what a commercial mortgage broker, commercial Realtor, attorney, or CPA is telling you. In other words, you may find that you’re re-inventing the wheel at times!
Entrance Difficulty Level: Difficult
Next Edition: Buy and Sell Investments
I’ve done real estate investing successfully since 2003 and have blogged about it since 2005. A word to the wise: before you invest, check with an attorney and a CPA to evaluate your goals, investing options, and the laws in your state.