When you want to make investments as a passive investor, there are numerous strategies that you can use to strengthen your portfolio. Among the most effective strategies that can bring in consistently high returns involves making investments in real estate. While it’s possible to manage the property investments that you make without any assistance, this would be considered an active investment strategy. When you purchase property to increase your passive income, there are two distinct options at your disposal, which include in-house property management and third-party property management.
What is Passive Investing?
Passive investing is an effective investing technique that aims to maximize returns by reducing buying and selling. In many cases, this is a long-term investment strategy where the passive investor will hold on to the investment for a lengthy period of time before selling it. Whether you purchase real estate or fine art, the point of making this type of passive investment is to sell the investment once it has increased in value and has provided you with the desired return. In today’s market, investing in properties is a relatively low-risk investment opportunity since property values have been increasing steadily for more than a decade.
Another popular form of this investment strategy is index investing, which involves a portfolio of bonds and stocks that mimics the overall performance of a specific financial market index. Since these funds aren’t actively managed, they have less fees and expenses to them. The general belief with financial markets is that they will have a stronger long-term performance when compared to single investments, which is why index funds are designed to match the return and risk of the market. By making the right investments with this strategy, you should be able to bring in steady passive income that will help you build your wealth.
What Is In-House Property Management?
The first method of managing the properties that you invest in is with in-house property management. This form of management can be provided by a full-service management company on an in-house basis. Instead of depending on outsourcing for your property management needs, hiring an in-house management company will allow the management of the property to occur within your own company. When you’re searching for the ideal property management solution, efficiency is key if you want to meet your expectations for the investment.
If you opt to self-manage the investment, you would be tasked with making individual hires to assist you in managing the property. These hires would cost a significant sum of money, which would only add to your expenses. Keep in mind that you would be required to evaluate every hire on your own to find the right accountants, CPAs, property managers, and project coordinators. If you decide to hire an in-house management company, your main focus would be on hiring the right property manager for the job.
Once you hire a reputable company, they should only come to you in the event that major problems occur or to provide you with status updates. The property manager will identify and evaluate prospective tenants for the property. When tenants apply, the management company will perform background checks and verify income. They will also draft up rental agreements and deal with any issues that arise while the tenant resides in the property.
What Is Third-Party Property Management?
While you engage in wealth building, it’s possible that you will only invest in 1-2 properties, which may make it more cost effective to hire third-party property management companies instead of bringing these companies in-house. Hiring a reputable third-party management company means that you will likely be paired with a property manager who has years of experience in managing properties for passive investors. These property management companies typically service multiple properties and have the infrastructure necessary to perform management in many areas around the country. They will perform all of the same tasks as an in-house property management company.
The main difference between in-house and third-party property management companies involves flexibility. If you have an issue with how your property is being managed or would like to make some changes, it may prove difficult to get in touch with the third-party management company. It’s also important to understand that third-party management companies handle many properties, which means that they may not treat your property with the kind of focus and attention that it requires. If you’re unable to provide some oversight with the company that you hire, issues with unpaid rents and poor tenants may not be resolved as swiftly as you would like.
Pros of Using In-House Property Management
Passive investing is a type of strategy that can be used with a wide range of different investments, the primary of which involves real estate investments. If you invest in one or more properties, it’s important that these properties are adequately managed. When hiring a property management company to manage the property for you, the two options available to you include in-house property management and third-party property management. While a third-party management company may be effective at managing your properties, it’s recommended that you consider in-house property management for the best results. The main benefits of using an in-house management company include:
- As long as you have economies of scale, using an in-house management company can be cheaper than hiring a third-party provider. For one, the property management fees should be significantly lower. You’ll also benefit from lower construction management fees and lower material costs. For the materials that you purchase, you won’t need to pay the margin to third-party companies. Construction times will also be shorter in most situations.
- As a passive investor, bringing a management company in-house allows for more integration, which is more appealing to most investors.
- The quality of service is better since you can manage the team that you hire. With third-party staff, you may run into issues where they don’t produce timely results or are unable to efficiently manage issues that arise with the property.
- In-house management companies focus entirely on your investments as opposed to providing service to many clients. As such, you will benefit from better and more focused service. The management company that you hire will always be aware of each tenant, all maintenance concerns, and any possible issues.
Cons of Using In-House Property Management
To effectively engage in wealth building, it’s important that you minimize risk and make smart investments. While there are numerous benefits attributed to in-house property management, there are also some potential issues that you should be aware of. The main problems that can occur with in-house property management include:
- You will need economies of scale to bring property management in-house. If you only have a few properties, you likely won’t be able to pay every team member
- It’s possible that the manager you hire will be less experienced and knowledgeable than you would prefer, which increases the possibility that a mistake is made while they are managing your property. The difference with third-party managers is that they are tasked with managing tens of thousands of different properties. Depending on the size of your business, you may be unable to attract the top talent in the field. You can mitigate the risk of a bad hire by doing your due diligence.
Both in-house and third-party property management have their advantages. However, in-house property management is likely the way to go if you want to make sure that the team you hire is dedicated solely to managing your investments. As long as you hire an individual who has extensive experience with property management, you can be confident that your property is in the right hands. With the consistent returns that can be earned with this type of passive investment, you can start adding to your wealth in a short period of time.