Is Real Estate a Passive Investment?

As a Real Estate investor in Toronto, I’ve often wondered “How passive is real estate investing?” Unless you hire a property manager, the responsibilities of finances, tenants and managing the property rests on your shoulders and some days the investment is anything but passive. You need to ask yourself if the long-term gain of the investment is worth the pain? The answer is yes of course (at least to me), but if you are managing it yourself, it might be a little less passive than you think.

Let’s take a typical condo in Toronto: 700 square feet, a gym and swimming pool, and close to Toronto’s Subway line. You paid $350k for the condo and your maintenance fees are $476 monthly. There is a property manager who works for the condo corporation so technically this is closest to the “passive income” status! Let’s dig a little deeper in understanding what you still need to be aware of.

First, you need to understand the market rent for that area and specifically how to price your condo in the rental marketplace. Price it too high and you could end up missing a month or more of rent. Price it too low and you might be stuck with an investment yielding a return below market rent. Are you aware of the current vacancy rates?

How about advertising the condo? Where do you list it? Do you hire somebody to market it for you? What are the provincial parameters for the content of the ad? Stipulating “ideal for students or young professionals” or “no smokers” can get you in some serious trouble. Next, you should become familiar with Landlord tenant rules. When can you enter the condo and how much notice is required? Can you increase the rent? How often? What do you do if the tenant stops paying the rent? What can you legally ask for on a rental application? What about a lease, pets, smoking? Have you ever tried to get the smell of cigarette smoke out of carpets? It’s not fun.

Of course you will be responsible for choosing your tenants. Probably the most important decision you make, the wrong choice can cost you dearly. Do you know how to screen tenants, verify income, do background checks, read a credit report and ask the right questions? Too many investors have run scared from real estate after a costly tenant decision.

What do you say when you decline a prospective tenant who is not suitable (for what ever reason)? Once again, the wrong reasons can land you in front of the rental tribunal.

Another important consideration is time. Do you have the time to manage the investment property? This might depend on the flexibility of your job, whether you like to do things hands on, or the number of properties or even units in your portfolio. Are you comfortable with phone calls from tenants or vendors during, dinner, at night or when you are on vacation? For some, the stress is unmanageable, for others it isn’t. It really depends on the individual.

A successful Real Estate investment entails a sound strategy and a pro-active approach with a great team around you. You need a good accountant, investment real estate agent, mortgage broker and possibly a property manager to help.

So, is real estate a passive investment? This all depends on your perspective.

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