How Passive can it be to own larger apartments?
Property Manager · Sarasota, FL · Member since 2015 · 21 posts · 6 votes
How passive can someone invest/own larger apartments? Say someone makes enough in their primary business to invest in larger apartments (40-200 units) and decides to hire a good 3rd party manager. How passive of an investor can this owner be? Grant Cardone owns thousands of units, and he claims its all passive (which sounds like it would be seeing that his primary business takes a whole lot of his time).
We have a 46 unit MF that is professionally managed. We give the PM general direction and monitor their performance. We also handle the insurances. The PM does everything else. Leasing, maintenance, etc. I think our PM is very good, but this is not as passive as investing in a syndication. For example, PM's can be more concerned about keeping high occupancy than keeping up with market rent increases, and you may end up charging under market rents. So, the owner must know rents in the market and work with the PM to strike a balance between maintaining high occupancy and not leaving money on the table. So, if you want your investment to be maximally profitable, you need to act as the asset manager, or hire one if your holdings warrant that. Having said all that, we (two of us) probably spend a total of 2-4 hours/month on the property.
@Patrick Tudor If you invest in a proper syndication that can be passive-very passive. If you buy a building and hire a PM it will be quite passive unless there is a serous meltdown and then there will be some involvement on your part. A PM is a filter-some extremely good some not so much. If you own a building you will want to have a say on how that assett is handled. You could tell the PM 'I never want to hear from you'; but IMO that would be unwise. All the best!
@Patrick Tudor If you move up to that level , you start your own management company that is responsible to you and you only . Put the right individual in charge and it will be passive , and the opposite is also true
Even with a 3rd party manager your work as an asset manager is not passive. It can be a lot of work. It won't be full time but it's not hands off either unless you want your asset to go down the toilet.
We have a 46 unit MF that is professionally managed. We give the PM general direction and monitor their performance. We also handle the insurances. The PM does everything else. Leasing, maintenance, etc. I think our PM is very good, but this is not as passive as investing in a syndication. For example, PM's can be more concerned about keeping high occupancy than keeping up with market rent increases, and you may end up charging under market rents. So, the owner must know rents in the market and work with the PM to strike a balance between maintaining high occupancy and not leaving money on the table. So, if you want your investment to be maximally profitable, you need to act as the asset manager, or hire one if your holdings warrant that. Having said all that, we (two of us) probably spend a total of 2-4 hours/month on the property.
Different people have different definitions of "passive investing".
Some say, buying a house, placing tenants there, and then getting a phone call in the middle of a night about clogged toilet is passive investing. LOL
So from my stand point, passive investing is when you spend the minimum amount of time and gain the maximum reward for such. Syndication is one example where equity partners (aka limited partners, aka passive investors) spend the least amount of time on it and generate passive income.
If you have any additional questions feel free to PM.
@Patrick Tudor the closest thing to true passivity is being an LP (limited partner) in someone else's security (real estate, biz, etc). Even in that scenario you'll need educate yourself as an investor.
Grant Cardone has a great model. Funnel income from his primary businesses (education, books, products) into income property. He's grown an asset management team (they manage the property management team) so his investments have become more passive; allowing him to focus on what he does best.
In general it's a model that the truly wealthy use. For me; I started a property management biz first. My management firm is the vehicle that generates incomes in which I funnel into my own real estate deals.
Most of my clients do the same thing via their biz, medical practice, high wages, etc.
If you want to be truly wealthy do the same thing: grow a biz and funnel income into income property that's very hard to destroy!
Nothing in this world is truly passive. Anyone who tells you otherwise should be a red flag.
All the best man!!
A way to become wealthy (whether "just wealthy" or "truly wealthy") is to funnel money into income-producing assets.
Excess income from a job might make you "just wealthy" because there are limits on how much money most people can make for their time. Excess income from a business might make you "truly wealthy" if the business remains profitable and growing. Either way, vigilance, which takes time to do, is needed to make sure the income sources and investment uses stay on track. It's a high-class problem to have.
The only exception to nothing being truly passive might be for those people who put their wealth into a blind trust (as U.S. presidents often do). The managers of the trust do what they have to do with the money and the owners of the wealth have no idea what is being done with it. The owners of this wealth go about making their decisions of geo-political importance and receive their annual tax statements from the trust.
I became "mass affluent" with regular contributions from my job income into mostly index funds (investing in the entire U.S. economy) in taxable and retirement accounts. Today, I have food on the table and a roof over my head without having to go to work to get the money to pay for it. Other people have accomplished the same thing, but with real estate as their source or use of funds. We make the money we need to live on now while we sleep or take the day off, which is passive enough for me.
Even with a 3rd party manager your work as an asset manager is not passive. It can be a lot of work. It won't be full time but it's not hands off either unless you want your asset to go down the toilet.
Thank you for the reply! Say your properties are mainly B-Class properties with little to no deferred maintenance (at the moment), what specifically would you be doing as an asset manager (as the only owner) besides: Studying the market/raising rents, monitoring pm performance, deciding when to sell/refinance, negotiating deals with purchasers/sellers?
We have a 46 unit MF that is professionally managed. We give the PM general direction and monitor their performance. We also handle the insurances. The PM does everything else. Leasing, maintenance, etc. I think our PM is very good, but this is not as passive as investing in a syndication. For example, PM's can be more concerned about keeping high occupancy than keeping up with market rent increases, and you may end up charging under market rents. So, the owner must know rents in the market and work with the PM to strike a balance between maintaining high occupancy and not leaving money on the table. So, if you want your investment to be maximally profitable, you need to act as the asset manager, or hire one if your holdings warrant that. Having said all that, we (two of us) probably spend a total of 2-4 hours/month on the property.
Thanks for the reply! How did you go about finding your PM?
Even with a 3rd party manager your work as an asset manager is not passive. It can be a lot of work. It won't be full time but it's not hands off either unless you want your asset to go down the toilet.
Thank you for the reply! Say your properties are mainly B-Class properties with little to no deferred maintenance (at the moment), what specifically would you be doing as an asset manager (as the only owner) besides: Studying the market/raising rents, monitoring pm performance, deciding when to sell/refinance, negotiating deals with purchasers/sellers?
'Besides' just that there is not much if you don't consider all of that much work. Monitoring PM performance is a lot of work for me because I just haven't found a 3rd party PM that has allowed me to be hands off. I have two 2000 built B-class apartments just like your example and I'm still fighting with expenses for landscaping, the pool, etc. Even without a ton of deferred maintenance the property still is 13/15 years old and things are breaking down. And most PM companies leave the marketing up to the onsite or regional manager and they're more than happy to just stick with craigslist and greensheets and apartments.com. And I just don't think there is a strong coherent strategy so we end up taking over and handling that. Most PMs are happy to have a stabilized property but we like to push marketing to allow us to have a waitlist so we can push rents.
@Patrick Tudor - PM was recommended by the lender originally and has worked out fairly well.
First, forget anything under about 90 units if you want any resemblance of passivity. The numbers don't work to accommodate professional management infrastructure, and professional management doesn't want that deal.
Secondly, if you are indeed going to adhere to number one, and go after bigger stuff, then you will either run it, which is not passive or invest in it, which can be quite passive. Good luck!
I would definitely consider all that work. I was just trying to figure out if I was missing anything, and how much monitoring you actually had to do. What exactly do you do to push marketing? Thank you for your time and for the inside look of issues/management! I operate my family's few restaurants so I understand things break down (even new things).
First, forget anything under about 90 units if you want any resemblance of passivity. The numbers don't work to accommodate professional management infrastructure, and professional management doesn't want that deal.
Secondly, if you are indeed going to adhere to number one, and go after bigger stuff, then you will either run it, which is not passive or invest in it, which can be quite passive. Good luck!
Thanks for the input! Grant Cardone often speaks about the secret number of units is 38 (to be able to pay a pm). What do you think is the difference between the management you are speaking about and he is speaking about - is terms of passivity?
Glad you replied - checking out your website!
If you want passive income from investments in real estate then you need to invest your money as an investor, not as the owner, sponsor or syndicator. You can do both, as I do, be the sponsor on a deal and invest passively as a private investor. Here you get to share in the Sponsor's equity, active income and treated as such by the IRS, and the Investor's equity, passive income and subject to passive loss rules.
As a sponsor, owner, or syndicator, even if you have a third party firm managing the property, you still have to manage the manager, the investors, and the investment. This is in no way a passive activity, even though it may be part time, and you will want to show it as full time for tax purposes.
As a private investor you have no decision making in the deal, and all you get are monthly, quarterly or annual statements, depending on the sponsorship, so there is no active participation in the investment. You don't even get voting rights in the LLC.
Disclaimer- I'm not a CPA nor an attorney so please seek advise from them before making a final decision about how to invest you money.
First, forget anything under about 90 units if you want any resemblance of passivity. The numbers don't work to accommodate professional management infrastructure, and professional management doesn't want that deal.
Secondly, if you are indeed going to adhere to number one, and go after bigger stuff, then you will either run it, which is not passive or invest in it, which can be quite passive. Good luck!
Thanks for the input! Grant Cardone often speaks about the secret number of units is 38 (to be able to pay a pm). What do you think is the difference between the management you are speaking about and he is speaking about - is terms of passivity?
Glad you replied - checking out your website!
PM infrastructure requires at the very least the following:
Maintenance Tech
On-site manager
Actual PM fee to cover overhead and profit margin for them
Do the numbers. If you ay $50,000 to the on-site manager, and $45,000 to the tech, plus benefits and FICA, you are talking $130,000 per annum. Add to that 3% - 5% fee.
Ask yourself - how many units will it take to be able to absorb this cost structure if your rents are $900 - $1,300 per month? Do the math :)
And then, after you do the math, send Cardone an email and tell him that he is full of **** :)
Now, is it possible to half-*** management? Yes, everything is possible. But, I thought you wanted passive lol
I protest the word "passive" when it comes to real estate. It is not, unless you buy corporate NNN properties, like a Walgreens.
Renting residential real estate is a business. And over 50 units, it quickly becomes a full time job.
The best landlords, especially larger ones, run their own management in-house. Third party management often has disappointments. Even if you hire a manager, you need to "asset manage" on top of them. You need to visit the property, have knowledge of collections, vacancies, repairs and deferred maintenance. You need to talk to your property manager often.
Passively managed properties often sub-perform. My opinion.