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By: Syeda Gul-e-Khansha
May 27, 2021
Active vs. passive property management: which one is better for you? If you're planning to hire a property manager or considering property management as a career path, chances are you've thought of this question before. Maintaining, controlling, operating, and overseeing real estate or physical property is called property management. According to the World Property Journal, the US housing market is worth 33.6 trillion dollars. That means there is a lot of earning potential in investing and managing real estate. However, investors often hold polarized opinions between active and passive property management when it comes to property management. While both strategies are beneficial, each comes with its own set of pros and cons.
Here's a complete breakdown to give your insight into which would be the better option for you.
Property management is the supervision and oversight of a property conducted by a third-party contractor. Property managers are responsible for the daily repairs, upkeep, maintenance, and security of properties.
They are paid a fee for the rent generated from the property they are managing. There are laws in place in every state to regulate the activities of property managers.
Here are a few things property managers are responsible for:
• Rent collection
• Vetting potential clients
• Property maintenance, including landscaping and snow removal
• Drafting, signing, and renewing leases for landlords
• Creating and sticking to budgets for maintaining the property
• Ensuring necessary property repairs
According to research conducted by iPropertyManagement, the US property management industry generates $88 billion in revenue annually. Furthermore, more than 70% of property managers oversee leases, advertise vacancies, and manage repairs.
Many landlords have multiple properties in their portfolios. That means they lack time for individual property maintenance and tenant dealings. Others are only interested in owning rental properties and earning profits from them. In both these cases, hiring a property manager to oversee things is a safe option. When it comes to property management, two common strategies are widely considered. Active and passive property management. So, which approach should you adopt? Let us find out by analyzing and comparing them both.
Active property management is the more hands-on approach when it comes to managing real estate. Active property owners are interested in daily updates concerning their property. So, active property managers are responsible for having complete insight into the property and how to generate maximum rents.
Their tasks include:
• Managing risks and minimizing losses
• Maintaining accurate market comparable rent prices
• Reducing average repair and eviction cost rates
• Active marketing of the property (communicating face to face with applicants)
With active property management, the owner is kept in the loop for all decisions regarding the property. Active property managers consult owners when advertising and selecting tenants for the property. Detailed reports, estimated prices, and photos are shared with the owners when property maintenance and repair are discussed. Overall, with active property management, the owners and the property managers are in constant communication.
In terms of investment, an active investment strategy is geared towards benefiting from short-term price fluctuations and beating the stock market's average returns. It requires a team of analysts that consider various factors to determine precisely the right time to buy or sell assets.
In passive property management, the communication between property managers and owners is less frequent. In some cases of passive property management, the owner might not even be living in the same state. They do not require day-to-day updates and are much less involved in the process.
Passive property managers must do the bare minimum to collect rent and retain a client base. They receive income and answer queries on a surface level without going in-depth with the management process.
Unlike active managers, passive managers select the tenants and keep records without the constant supervision of the owner. The decision concerning property repairs and maintenance also usually depends solely on the passive property manager.
In a way, there is more freedom for property managers if they acquire a passive approach; however, that also means that the lack of supervision by the owner could potentially lead to errors. Passive management consists of an investment strategy that focuses on a long-term basis. It means essentially buying security for the long term. Here, property managers do not consider the short-term price fluctuations and market timing for profit.
Now that we understand the two approaches, we need to determine which suits you the best. Of course, when you are managing your property, you automatically fall into the "active property management" category. You are doing everything yourself without any outside help.
Another example of active management would be acquiring a single-family residence and utilizing it for rent purposes. In this case, you can hire a third-party contractor to give you constant updates regarding the property. On the other hand, passive investing would be like investing your money in apartment syndication that a sponsor manages. Here, you will not be much involved in property management.So, which approach should you choose? Here are some significant differences between the two to help give you some insight:
With passive investment, you do not have complete control of the asset. You invest your money with a capable sponsor who will then use it to manage the property. You don't have much influence in the decision-making process concerning the property. You also won't be a part of the business plan. All of that would be left up to the sponsor. Of course, that requires a lot of trust on your part. That's why before investing, you can come to a favorable agreement with the sponsor.
For example, you can agree on receiving a pre-determined return before the syndicator gets any money. That gives the syndicator further incentive to achieve a return that exceeds what you will receive. As an active investor, you can have complete control of the business plan. Your property manager has to involve you in every decision. You will determine the required renovations, criteria for tenant acceptance, the rental rate and when to sell, all these things.
With active investment and property management, it means more control over the business plan. With more power comes more responsibility. You will be responsible for educating yourself about the renting system. Property managers will expect you to be in touch with them daily. You will review all bookkeeping records, decide on the property, and know the ins and outs of how the property is being managed. Of course, automation can help make these tasks more accessible, but that requires expertise and cannot happen quickly.
All this means you'll have to sign up for a more significant time commitment. Similarly, you will be directly involved in risk management. So, if unexpected losses occur, it can be pretty stressful. With passive investment and property management, you don't have to worry about a thing! The sponsor or the property manager will handle all matters concerning the property. You only have to invest your money and get updates monthly. Since you won't be involved in the decision-making, any losses will not be your burden to bear.
Overall in comparison to active property management, passive property management can be more hassle-free and less stressful for many. When there is no need for a more significant time commitment, you can focus your attention on other important things.
There is comparatively less risk involved in passive investment. That is because you are investing your money in an already proven system of investment. Your capital is in the hands of an experienced sponsor, and your returns are more certain. The risk of making bad investments and getting lower returns than the market's average is less with passive investment. That, however, means that you cannot invest as you like. You do not have the freedom to invest in appealing ventures that may end up being lucrative.
On the other hand, with active investment, the risk is high, but so is the return. You get all the profits as you have total control of the asset. That also means that in case of losses, you will have to bear all of them alone.
Aside from that, where property upkeep and management are concerned, the passive approach may prove riskier. That's because property managers are not as thorough as they would be with an active approach.
If property managers are not as invested in the maintenance of your property, you can incur some losses, for example:
• Asset degradation due to lack of preventative measures
• Lack of market education leading to Inaccurate rents
• Improper follow-ups on cost/repairs related to work order requests
• No reconciliation of payments since property managers are just pushing notices without negotiating
These errors can be avoided through active property management. Active property managers are more conscious of the client's needs and educate themselves with all they need to know. Constant supervision of the owners ensures that there is less room for mistakes.
Active Portfolio managers follow trends in the market and shifts in the economy and the political sphere. This data is then used to buy or sell assets. Intensive research is required. More major market risks are involved in active portfolio management, and the goal is superior returns. Property owners are directly involved in active property management.
Passive portfolio management is a less proactive approach. It is usually risk-free. Usually, passive investments are to get returns that are the same as a chosen market index. Property owners need not be as directly involved in the management of the property. Passive vs. Active property management? Which one should you choose? It all depends on your resources, the time commitment you are willing to make, and the risks you are ready to take. We hope this article proved to be helpful for you in making this decision.