My Real Estate Involvement didn’t stop at the purchase
When I first started my real estate journey, I basically had no idea what I was doing. That is likely true of many people who entered it by accident. I purchased my first condo as a place to live because real estate was going crazy in southern California. As part of the purchase process, I was provided with copies of the most recent financial statements and CCC&R’s for the Home Owners Association (HOA). Honestly, they were not that good, low reserves, high rent to own ratio, etc. This raised red flags for the lenders, which caused a bit of heartburn. I was eventually able to close though. In the year after I closed, there was a special assessment put in place to cover some repairs. There was also talk of another one being necessary.
These factors, along with the fact that it was difficult to get more information about what was happening, led me to join the HOA board of directors. For the first few years, it was as an advisory member, with no voting rights, etc. As time has gone on, I have gotten more involved on the board, in part because no one else volunteered, but also because there were financial issues that put the HOA, and thus, every owner’s investment, at risk, and had to be addressed.
You have to make a choice
As you can see, I made a conscious choice to become more involved with the HOA than simply being an owner. I was willing to put the time toward being a board member because I saw it as a way of protecting my investment.
This same choice is repeated every time someone purchases an investment property. Some people want to be very hands on, and manage the property themselves. In the case of a condo, it is possible to take that to the next level and get involved with the management of the HOA. Other people are either not interested in, or not able to have this level of involvement in their property. This could be due to other work obligations, being an out of town investor, the number of properties they own, or simply a desire to focus on their strengths, which don’t include property management.
Let’s take a moment to look at the different levels of involvement, starting from most involved to least. I mentioned two above, but there is room in the middle for a third. With each level, I’ll talk a little about what they might entail, and why you may want to choose each one.
You manage your property, and then some
If you purchase real estate, and the thought of having someone else be involved with managing it seems foreign, then you probably fall in this category. There is an expectation of higher levels of effort required on your part. You will be finding tenants, coordinating repairs and rehabilitation, and potentially helping out on neighborhood boards or HOA boards where your property is located.
This level of involvement will expand or contract to utilize the resources you have available. It will also be constrained based upon the location of your properties. If they are close, you will be able to manage more of them like this. The more spread out they are, the more likely you will need help.
More properties and larger distances may still allow for high involvement if you either put together and manage, or are part of a team. In that case, you may be heavily involved in some properties, while your team handles others with you having close oversight.
The benefits of this style of management are the intimate knowledge you will have regarding your properties and the connections you gain in doing so. This will also give you a breadth of experience in the different areas of real estate property management. That experience will serve you in the future should you adopt a lesser degree of involvement by knowing what to look for with property management companies.
You bought it, they run it and you check in regularly
This will probably be the 2nd most common group that real estate investors fall into. In this situation, you may do the legwork to find a property and make the purchase, with the understanding that you will have a property manager handling the day to day operations. There is still a range in the amount of interaction that you can have, and this depends on your comfort level. If you are confident in the property manager you have found, it may be possible to simply check in once a month when you receive their financial statements, and either acknowledge a deposit or make a transfer if money is owed for expenses. On the other hand, you may choose to handle some functions, like paying bills, or coordinating repairs while leaving tenant management and rent collection, to the property manager. This and other configurations will break along the lines of standard themes: proximity to property, number of units owned, other businesses, family responsibilities, etc.
The benefits arise in the time that you have to put toward other endeavors, which could be another business or relaxing on the beach with a fruity beverage. The point is, that you have a choice. If you only hand off part of the responsibility, you have the choice to offload those items that are either not you favorite, or are ones that keep you from focusing on higher management functions of your business.
Either way, this choice is predicated on the quality of the management team you have put together. The more in sync they are with your needs and concerns, and with good property management principles, the more responsibility you will be able to give them.
This style may be an outgrowth of the more involved first style. As you become more comfortable with your property management team, you may be more willing to increase their level of responsibility.
Real Estate is part of my investment portfolio
This stage is essentially the set it and forget it model of real estate investing.
You may either choose this stage or it may choose you. If you have a number of different businesses, of which real estate is just one, then you might have a dedicated team that handles it with a lot of autonomy. You may be playing to your strengths here, knowing that the management of real estate is not your strong suit, but you want to have it in your portfolio.
Some real estate investments may put you in this category by their nature. Examples of these are Real Estate Investment Trusts (REIT), or if you are involved in the financing side of the transactions. In both of these cases, you are essentially providing funding for another entity to purchase and manage real estate.
The obvious benefit of this is that you have essentially no management responsibility. Real estate is simply an investment you keep like stocks or bonds or an ownership in another business.
The downside is that if something goes wrong, your investment may be at risk. You have very little latitude to step in and take over. In the event you did have the ability to step in, you may not have enough warning to be able to intervene in time to make a difference.
How to decide, and where do I stand?
Let’s talk about where I stand first. I fall between the full control management and the property manager with oversight. I personally manage the property close to me, as it is relatively low oversight and easy to handle. I also remain on the HOA board, so my involvement is high. For properties that are not close, I use a property manager. Even then, I continue to pay a number of bills and approve work to be done, so it is definitely not a hands-off management style.
Hopefully some of the downsides listed, aren’t too much negative to scare you. There is a long-standing rule that you should only invest in things you understand. You should also do your due diligence before making any investment.
In this context, due diligence is learning as much as you can about property management and real estate. This, in combination with your knowledge of other investments, will guide you to the level of involvement you need to have to be comfortable, and hopefully, ultimately successful with a real estate investment business.
In the comments, tell me what your involvement level is in your real estate investments.