“Why did I need all this mess?” he asked me over the phone, and went on: “They promised me passive income. They promised me that if I just bought this apartment, I would have a steady income entering my bank account every quarter without my having to do anything.”
He did not see my smile, but it is the smile that spreads across my face every time I hear this complaint. That sentence captures the frustration of many foreign real estate investors, who buy the apartment hoping for passive income while not really understanding what the term actually means.
This client bought an old apartment about a year and a half ago and renovated it partially (mostly a cosmetic renovation), and it is managed by an experienced, reliable management company that I know.
“How much time do you spend taking care of the apartment? Dealing with the management company?” I asked.
“I haven't really measured it, but at least once a week I get a phone call from them that requires me to deal with the matter. I thought I was buying an apartment and the money would flow into my bank account,” he replied.
“And suppose you had bought an investment apartment in Israel, wouldn't you have had to take care of it? Find tenants, deal with repairs?”
“I suppose I would have, and I would probably have handled it myself,” he answered honestly.
Passive income for a real estate investor is a steady or immediate stream of income received from an investment in a property, with minimal involvement on the part of the investor. In other words, after an initial investment in the property, the investor enjoys ongoing income while taking minimal active part in managing or maintaining it.
Just like buying a property in Israel for investment, the property has to be managed. When the management is remote, problems will always arise, and even if you chose a management company with references, which does its job in the best possible way, you as the owners still need to be involved and interested (if only to make the management company stay alert and look after the property properly).
Risks related to remote management:
- Difficulty finding tenants: Finding quality tenants can be hard, especially for investors who are not familiar with the country (culturally, behaviorally, regulatorily and so on) where the property is located.
- Ongoing management: Managing a property from a distance can be complex, and requires finding reliable and efficient property managers.
- Communication: Poor communication with tenants or property managers can lead to problems and delays.
Risks related to the property:
- Natural damage: Earthquakes, floods or other natural disasters can damage the property and lead to high repair costs.
- Maintenance: Neglected or old properties may require expensive ongoing maintenance (if we do not supervise and check the management company, we will be charged expensive repair costs that will cut into the current yield).
- Eviction of tenants: Evicting problematic tenants can be a long and complicated process.
How much time do you devote to looking after your property abroad?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית