Passive, hands-off real estate investment?

[Grigory]

My situation in a nutshell:
I make $50K a year. I have $35K in savings. (Had to get student loans out of the way first...) I tend to move a lot. (My job gives large financial incentives to employees who can move to another state to help open new branches. That, and my wanderlust.)

My goal: to buy a piece of real estate that would provide stable income and would require either no management at all (a piece of land in rural Montana? renting the land to a trailer park?) or could be managed by a third party who would take care of the tenant drama and day-to-day details without my involvement.

Since there's no telling whether I'll live in the same city or state 3 years down the road, let alone 10, there would have to be minimal involvement on my part - ideally, just signing the annual statements. I know there are middle-man companies that can manage people's properties for them: find tenants, deal with them, etc. Assuming everything goes according to plan and the low-medium-level property is rented out, what's their cut? Is it worth it in the end?

Are there any other "hands off" investment options I'm missing?

[stevesteve]

So I'm not expert but is there a reason you want real estate?  There's always risk and issues that can come up.  Liability, non-payment of renters, etc.  A management company can deal with most of that but it costs you.  I can't imagine it not being a hassle.

If you really do think real estate is the way to go for some reason then have you thought about investing in a REIT?

[Grigory]

I want many things. ;) Real estate is just one of the many options I'm brainstorming at the moment. Stocks are too volatile, bonds are too boring and have low ROI, etc.

I hadn't considered REIT investing, though - thanks for the tip!

[arebelspy]

Owning a REIT is nothing like owning real estate.

That being said, I have to agree with steve... You need to figure out why you want real estate.

The rest of your questions are easy to answer (6-10% is typical for a property management company).

But you need to figure out your investment goals, not just blindly pick an investment.

I say this as someone who is a big fan of owning rental real estate - it may not be for you.  (Or it may be.  But that needs to be determined FIRST, not as an afterthought, or, more common, not at all).

[olob]

I personally love real estate, I've had a fascination with being a landlord since I was a teenager, so maybe factor in some bias here. I've owned two properties, the first was a miserable learning experience that I lost a few thousand dollars on if you factor in all that I put in to it, and the second has been easy money. Real estate CAN be passive and hands off, but you have to know what you're getting in to and some ground rules.

The first property I had no idea what I was doing, how much homes in the area should cost, what kind of tenants to look for, or how to care for a house. The place was a fixer upper, I bought too high, brought in the first tenants who responded to my ad (who were desperately searching days before driving cross country to live there, warning bells should have been going off, who finds a place days before moving and offers to take it before inspection?), and I spent approx 6 months both hiring contractors and doing everything I could do myself such as plumbing, fixtures, painting, etc to sell after I got sick of the place. The tenants were horrible, they fought so loud I couldn't sleep (it was a duplex with me living on the top) and had to call the cops on them. Had trouble with the local authorities for zoning because I didn't check and my agent assured me everything was fine (do your research yourself!). Great learning experience, and I luckily sold right before the housing crash and got out with minimal loss. I was able to increase equity by about 10k to cover the difference after buying too low so that I could get out.

The second property has had a few hiccups, but has been smooth sailing otherwise. I watched the market for over a year before buying and got in before housing prices jumped (you can't time the market but you should know off hand what kind of price a piece of property commands just by looking at it and comparing it with what you've seen in the past). I had money set aside and invested heavily in preventative maintenance, catching a birds nest in the laundry vent, bad wiring in one of the rooms that was arcing next to drywall, and fixing plumbing issues before they did a lot of damage. That cost me about 8 months of profit before breaking even. I hired a property manager after interviewing several of them at a rate of 8% of gross income per month. I required that I approve all spending over $300 and that I give the greenlight on tenants. They found a great tenant who has kept the place immaculate and has paid on time for about a year and a half now. I don't have to worry about anything, manager handles inspections and maintenance, but I do feel that I need to make sure I'm involved because no one will manage a place like it's their own.

So with that said, keep some things in mind with real estate:
-It's not easy to get in or out of real estate, it takes time, and the transaction costs are high. This means you are stuck unless you have enough money to cover the difference, and in my case I had to work my ass off to build equity for 6 months plus until I could get out. I consider myself lucky. If you lose money in the stock markets, unless you're on margin, you take the loss and it's over. Not so with real estate.
-You need a good amount of cash on hand as a buffer. The repairs to the second place that I consider easy cost me about 8 grand. I had set aside 10, and had gone in expecting to spend money on fixing everything. Inspectors will not catch everything.
-Research everything, and keep an eye on the market for a long time before buying. Be very choosey with real estate agents. My first agent totally took advantage of me not knowing what I was doing.

After getting through all the preventative maintenance with my second property and going positive after all the expenses I can't be happier. I'm earning a decent 6% on the total house price, and all I do is cash a check every month. It's awesome!

[ncornilsen]

closest thing I can think of would be commercial real-estate. In Portland I see alot of places going at a 1.6% cap rate, and generally, commercial renters do their own maintenance and lease for long periods of time...

Wish I had the liquid cash to own one myself!

[tdccarpenter]

farmland, commercial, triple net or REIT's are what I would consider depending on your interests.

Thomas

[AlanStache]

farmland?  ok.  Some family rented out land they lived on but did not want to farm themselves, ballpark how crazy hard is this?  Can some east coast city slicker do anything with 20k in Iowa?  Or is this really  a locals only club or you need really deep pockets?

[netskyblue]

farmland?  ok.  Some family rented out land they lived on but did not want to farm themselves, ballpark how crazy hard is this?  Can some east coast city slicker do anything with 20k in Iowa?  Or is this really  a locals only club or you need really deep pockets?

I live in Iowa, and my parents did the above with our farmland.  I don't know about an "outsider" doing it though.  Another thing people around here do is rent timber land out to hunters.  I'm not sure how you'd police it though, if you were a thousand miles away.

[booyah]

Farmland is really high right now in most farming communities. And locals really do have an advantage on knowing what is good farmland and what is bad. My dad is a full time farmer, and even though his entire life is based in this area, he is not buying farmland because it is overpriced and doesn't cashflow. It is cyclical though - prices will fall at some point.

[KBecks]

I love the thought of real estate…  for a few reasons… 1) ownership and control,  2)  steady returns and nice ROI and 3) tax benefits.

However, for now I'm focusing on the stock market and learning about stock options.  We just don't have the time to manage rentals, and I can do a lot of stock / options learning from home, which is a MAJOR convenience.  (We have 3 kids and a busy schedule.)   I can be more of a loner and work on it and that is helpful.  I am learning to write options for income, and the returns can be good.  It is also more liquid than real estate.  It was a choice based on our lifestyle and what was easier to get done.  I would still like to purchase rental real estate in the future, but if I get really good at stocks/options, then maybe I won't need to.  (I am paying a service Motley Fool Options / Motley Fool Pro for investing advice and education.) 

I have heard that real estate is a very forgiving investment if you are in it for the long term. I also hear that you have to buy right!  BiggerPockets.com has amazing real estate podcasts that will teach you tons and get you very motivated.

Good luck!  If i had the time I would be digging into RE!!! 

[KBecks]

An important thing for real estate is to have an emergency fund / cash cushion.   Keep saving!

[arebelspy]

We just don't have the time to manage rentals
...
If i had the time I would be digging into RE!!!

What is your impression of the time required?

Because I'd wager it's less than you're putting into the stock option writing, and much less risky.

Good luck KBecks.  Hope you make oodles of money.  :)

[dantownehall]

My dad is a professional commercial landlord, but I've opted to go the REIT route, apart from owning my home.

It's as hands off as possible, but returns (as long as you're careful) are good/have been good for me anyway.  I only invest in triple-net REITs with good histories, my favorite being O (not a recommendation/do your due diligence/don't sue me :) ).  I think I do as well as or better than a lot of landlords, with my risk much more spread out.  That said, there are great opportunities for landlords out there that probably would beat my returns, but you'd have to be willing to look hard and wait for the right deal.  My dad does very well, but our family had a unique situation (happened to own land in the right spot before it became the right spot).

I still work full time and don't really want to manage rentals currently, but I could see myself moving to a different house and keeping the one I've got as a rental on down the road.  Like arebelspy said, you need to decide more about what exactly you want to do and what characteristics you're looking for in an investment before you do anything.

For example, stock options can work well... until they don't.

[KBecks]

We just don't have the time to manage rentals
...
If i had the time I would be digging into RE!!!

What is your impression of the time required?

Because I'd wager it's less than you're putting into the stock option writing, and much less risky.

Good luck KBecks.  Hope you make oodles of money.  :)

(not to totally hijack this topic, but…….)

Thanks,  it is an interesting experience and not a get-rich-quick type of thing. I am not day-trading and I spend a few hours a week reading, planning, and investing.  I also spend a few hours a week learning and planning about improving our personal savings rate and saving money / living well on less.  It's been a great experience so far.

With the options, I'm just getting started.  It's all very new and I don't know how well it will work.  Originally when I was looking at real estate, I looked at a duplex down the street and estimated the rate of return to be about 7%.   I also attended local REIA meetings where the very confident leader says it's fairly easy to make 20% day in, day out, all day long.  I am not sure I believe that, to be honest.   I am paying a flat annual fee for advice, so there is a cost to it, and I am trying to be careful and work in small amounts as I learn.  It is not day trading, btw.  My goal is to see if I can reach a target of around 12% annualized.   This in my opinion might be comparable to what I could get in a real estate investment (assuming I would not have a sweetheart RE deal fall into my lap).   My progress is really like making $100 here, $200 there on put-writing.  I also consider this comparable to when RE investors target getting a minimum of $100/door/month profit.

The options are in addition to a long-term stock portfolio.  In Robert Kiyosaki's books, he mentions real estate as one way, and stock investing as the other path but he stresses that if you are going to do stocks, you better understand options, and that's why I'm specifically going in this direction.

You have to understand my husband wants nothing to do with real estate, he has his day job and dreads the thought of a honey-do list related to rentals.  I have a small business that I enjoy and it brings in a little bit and has some room to grow.  One of my goals of options investing may be to accumulate enough to outright purchase a rental.  I don't know.

I have been listening to Dave Ramsey (perhaps the total opposite of Kiyosaki, and I think it's good to get different perspectives,) and just read an interesting discussion here about paying off the mortgage with a linked study.  Right now I think our priority will be to pay off our mortgage early from increasing our personal day-to-day savings rate. (we will still have accumulated assets growing in the market).   Ramsey says that you should pay off a rental 100% and not go into debt (opposite Kiyosaki, who is unafraid of embraces leverage).  I am just starting to learn about using minimal leverage or at least access to leverage on margin to work with some more advanced options, like bull call spreads and synthetic longs.  This is all one big huge learning party, taking small steps here and there.

I can let you know how it's going in a few months when my first written options expire.  So far I've made an average of just under 6% on contracts that last 4-6 months each.  Interesting stuff!!   

It's my hope that when my husband retires from his day job, he might take up an interest in real estate, but if he doesn't, if he wants to do other things, then I have a Plan B that looks pretty decent.  :) 

[arebelspy]

Good luck. Not my cup of tea, and I disagree with almost everything in that post (at least 10 different statements), but rather than get into an argument or be negative, I'll just say I hope it works out for you (which is true).  I don't know anywhere close to everything, and it could be an amazing path to wealth.

Good luck. :)

[KBecks]

I'm very curious about which parts you disagree with, I may agree or disagree with your disagreement, but it's interesting to discuss.  I know that you say that managing rentals doesn't have to be difficult/time consuming, and I agree with that.  I'm dealing with my husband's perception of it.  And, I truly believe that a great marriage / strong family is my most valuable asset. 

I am also not saying at all that stocks/options investing is right for everyone.  I am working with it and spending time with it to see if it is right of me, and so far, I like how things are going.

[arebelspy]

I'm very curious about which parts you disagree with

Sure.  I started writing up a reply, but there was so much to reply to and it was just turning too negative, so I opted to delete it.  But I can give you that much at least.

Here is your post.  I alternated bold and underlining for separate statements I'd have a comment on.  One or two may be agreements, one or two questions, and most disagreements/challenges to your thinking.  Anything without bold or underlining I have no comment on.

(not to totally hijack this topic, but…….)

Thanks,  it is an interesting experience and not a get-rich-quick type of thing. I am not day-trading and I spend a few hours a week reading, planning, and investing.  I also spend a few hours a week learning and planning about improving our personal savings rate and saving money / living well on less.  It's been a great experience so far.

With the options, I'm just getting started.  It's all very new and I don't know how well it will work.  Originally when I was looking at real estate, I looked at a duplex down the street and estimated the rate of return to be about 7%.   I also attended local REIA meetings where the very confident leader says it's fairly easy to make 20% day in, day out, all day long.  I am not sure I believe that, to be honest.  I am paying a flat annual fee for advice, so there is a cost to it, and I am trying to be careful and work in small amounts as I learn.  It is not day trading, btw.  My goal is to see if I can reach a target of around 12% annualized.   This in my opinion might be comparable to what I could get in a real estate investment (assuming I would not have a sweetheart RE deal fall into my lap).  My progress is really like making $100 here, $200 there on put-writing.  I also consider this comparable to when RE investors target getting a minimum of $100/door/month profit.

The options are in addition to a long-term stock portfolio.  In Robert Kiyosaki's books, he mentions real estate as one way, and stock investing as the other path but he stresses that if you are going to do stocks, you better understand options, and that's why I'm specifically going in this direction.

You have to understand my husband wants nothing to do with real estate, he has his day job and dreads the thought of a honey-do list related to rentals.  I have a small business that I enjoy and it brings in a little bit and has some room to grow.  One of my goals of options investing may be to accumulate enough to outright purchase a rental.  I don't know.

I have been listening to Dave Ramsey (perhaps the total opposite of Kiyosaki, and I think it's good to get different perspectives,) and just read an interesting discussion here about paying off the mortgage with a linked study.  Right now I think our priority will be to pay off our mortgage early from increasing our personal day-to-day savings rate. (we will still have accumulated assets growing in the market).   Ramsey says that you should pay off a rental 100% and not go into debt (opposite Kiyosaki, who is unafraid of embraces leverage).  I am just starting to learn about using minimal leverage or at least access to leverage on margin to work with some more advanced options, like bull call spreads and synthetic longs.  This is all one big huge learning party, taking small steps here and there.

I can let you know how it's going in a few months when my first written options expire.  So far I've made an average of just under 6% on contracts that last 4-6 months each.  Interesting stuff!!   

It's my hope that when my husband retires from his day job, he might take up an interest in real estate, but if he doesn't, if he wants to do other things, then I have a Plan B that looks pretty decent.  :)

I can let you know how it's going in a few months when my first written options expire.

Please do.  :)

(FWIW, I'm somewhat of a fan of stock options, in certain situations.)

[KBecks]

That's really vague, but thanks for not being a complainy-pants about it.