Whenever one hears talk about retirement accounts such as an IRA or 401K, the experts always use the word diversification. The principle is that through diversification we can reduce risk. But isn’t it similarly risky to put all of your proverbial eggs in the stock market basket? It has been my long held belief that everyone should have at least one rental property in his or her investment portfolio, if for no other reason than diversification. Accepting that premise, the question is, should you be a landlord or an investor?
If you are self-managing your property, you are in the business of rental real estate, and you are a landlord. If, on the other hand, you hire a professional property manager, you are a rental real estate investor. The distinction is subtle, but important. When you hire a property manager, you are giving up some control in exchange for also giving up any headaches. As one of my colleagues wryly noted, “You have to be a certain kind of person to want to be a landlord, and you have to be a whole other person to be a good one.”
That “certain kind of person” either treats their rental as a business or allows a professional to guide them. Those are the only two choices if you wish to be successful and happy as someone who owns, holds, and rents real property.
To treat your rental like a business means to pay attention to the details. Can you tolerate doing paperwork? Are you detail oriented? How is your follow through? Be honest with yourself when answering these questions. These qualities are required in the business of real estate management. Running a rental business is no different from running any other kind of business.
If you are not comfortable with running a business, perhaps you should remove yourself from the business of owning rental property and instead simply focus on being a real estate investor. When you hold rental property as an investor, you are removing yourself from the process by hiring a third party to manage the investment on your behalf.
Hiring a third party, typically a professional property manager, can add an entirely new dynamic to your thinking. You now have a new layer between you and your investment. That management layer may or may not have the same expectations as you when it comes to renting your property. A fellow real estate investor once told me, If we want to be successful in investing in rental property, we have to learn to say yes.
When the manager calls and says you need to buy a new dishwasher for one of your units, you say yes. When the manager calls and says the tenant will be a couple of days late with their rent, you say yes. When the manager asks you to paint your purple walls, you say yes. When the manager calls and says that they need to reduce the asking rental price of your property because the market has softened, you say yes. When the manager calls and says it is time to raise rents, you say yes. Essentially, you are allowing the professional to do their job.
So are you capable of being in the business of rental real estate, or are you better off being a real estate investor? Both are perfectly acceptable answers. But when you can honestly answer that question, your overall satisfaction with your rental property will dramatically increase.