Pros And Cons Of Direct Ownership Over Rental Property

By on May 6, 2018

It might puzzle newer real estate investors to learn that there are indirect ownership of investment property other than the typical form of direct ownership.

In fact, there are various ways indirect ownership of rental real estate that are thriving in the investment world.

Some of them include REITs, timeshare, creative financing, and even just a typical shareholder in a real estate investment company.

But the most popular form of real estate investment is still direct ownership. And it is the most simple manner to get into the property game especially for rookies.

Why get into something you don’t fully understand when you haven’t even got yourself familiar with direct ownership.

To put it simply, direct ownership of real estate basically refers to the traditional way of owning real estate by way of a mortgage, and repaying that with rental income.

This is as basic as it gets. And it’s uncomplicated structure makes it easy to understand. Therefore, more appealing to regular investors and homeowners.

While you might to be tempted to become “more sophisticated” by going with indirect ownership investments, there are several major advantages when you have direct control.

Direct control

For someone chasing the goal of passive income, the idea of not having to do anything regarding the management of a rental property and continually receiving rental checks month after month can be appealing indeed.

But this arrangement can leave a lot to be desired.

If you just own equity in an asset or company, you typically have no power or say in how the investment is being operated.

This means that even if you find that the manner in which a rental property is being monetized and managed is ridiculous, there is very little you can do to rectify thing.

You might be able to sound out your thought to the people running the show. But that’s just about all.

There is no way for your to enforce systems or changes to change things.

Direct ownership and direct control makes you the master of your destiny.

You maintain the house, make decisions regarding it’s niche, contemplate how best to market the home to your target market, and can also ensure a high service level.

Moreover, you will be able to decide how much to insure your business for, make decisions on remodeling to uphold or even increase the value of the property, and select tenants through a fair screening process.

How your rental property performs in the short and long term depends solely on you.

This can be a better way of doing things when you know real estate.

The flip-side is that when you are an amateur in real estating, how would you know what you are doing is the way forward?

Management and maintenance

Some landlords find it more worthwhile to hire property managers to deal with the day-to-day operations of their rental property.

Some have the proper know-how to optimally manage their properties but chose to get specialists and experts to do so on their behalf.

Some have no experience at all and prefer to hire managers to manage their property.

The thing is… when you have direct control over a rental house, it also translate to you being responsible for all issues and problems regarding it.

This includes:

  • Repairs and maintenance
  • Tenant issues
  • Keeping up with mortgage payments
  • Structuring financing to minimize cost of financing
  • Managing vendors, suppliers, and contractors
  • etc

You might be able to save some money by taking on a hands-on approach to property management. But will the ends justify the savings?

If managing rental property is not your thing and you are not enthusiastic about learning it, then maybe direct control over it is not the best way to go.

Indirect ownership will take management off your hands while the fate of your investment will be left to the expertise and passion of others.

Yet don’t forget that real estate is just another type of investment.

If you are solely in real estate for investment and passive income, consider that there are various other types of investment that has the potential of generating passive income that has nothing to do with real estate.

Older homes will have more problems

It goes without saying that the prospect of older homes giving your maintenance problems is greater than a new home.

If you think that once you acquire a rental property, all that is left to do is collect rental income on a monthly basis, then you need to grow up.

Every house will eventually have problems and issues that need to be attended to. And these cost money.

Newer homes will undoubtedly be expected to experience lesser problems. And they usually come with guarantees from the developer anyway.

So if you want to have as little repairs and maintenance problems to solve in the short to medium term, going with newer homes will be a better choice.

If the value of the house holds or even appreciates within 5 years, it might just match the timeline of your exit strategy.

Suitable rental property

On the whole, the advantages with direct ownership should make it a preferred choice for rental property investors and landlords.

It allows you to take control and make decisions regarding how the property should be marketed and operated.

It is the way real estating should be in the first place.

Because as mentioned earlier, if you have no intention in getting your feet wet in real estate, there are many other types of investments that can provide a good yield without you ever having to get directly involved with it.

Don’t get into real estate just because it happens to be the bright shiny object of the times.



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