Are You a Hands-on or Hands-off Investor… or Both?
Everyone wants passive income and scour the internet looking for ways to supplement or increase their income. Whether the motivation is for retirement planning or simply wanting some extra cash, the belief is that increasing your number of revenue streams is the right thing to do — and this applies to professional investors too.
The bottom line here is that you need to have a basic investment plan which should provide you with a level of growth you would be happy with. This could be for your primary revenue source or if you are planning for retirement — either way you’ll be hampering your chances for success if you don’t have a strategy in place.
There are basically two schools of thought although you can get some that sit in between. Firstly, you have the hands-on style of investing where it’s almost like you are running a small business since you are more actively involved in preparing and executing against whatever it is that you hope will be making you money. The other option is the hands-off version in which you set an expectation on what your minimum returns are going to be and seek out options which require no active involvement. The idea here is to be able make a few minor tweaks or changes throughout the year but otherwise rely on the investment running on autopilot.
A good example would be comparing single family/multifamily to REIT’s. With single or multifamily real estate, you can benefit from great liquidity in that you can sell at any time and gain from appreciated values whilst profiting and having debt paid down on the asset over time from subsequent rental payments. On the flip side you also have the all-to-common tenant issues that can occur such as having to deal with plumbing issues, missed rental payments, roofing, maintenance and other repairs. These can easily eat away at your profits if not kept in check. Now if we look at REIT’s you can expect a hands-off investment which will provide you with a minimal ROI expectation but now you are entrusting your money with someone else to manage it all for you. Now this is great if you’ve qualified it well and everything goes to plan with funds being allocated correctly. However, on the flip side you could also end up in a situation where the REIT may have mismanaged allocations and those shares which paid you a guaranteed yearly preferred return of 8% are now worth a fraction of the price so apart from the income it produced your ownership hasn’t made you anything, or perhaps even put you at an overall loss. This is just a small very obvious example but I will be delving deeper into the framework surrounding REITS and comparing different types of investment structures in later posts so stay tuned!
My personal opinion here is that I think it is good idea to have some experience with hands-on investments as it helps you better qualify the hands-off options presented to you. By having a small part of your portfolio being assets you actively manage I think, keeps you ahead of the curve. By doing something hands-on means you are constantly having to overcome obstacles by educating yourself, adapting and dealing with unpleasant situations, variables and anomalies. If you focus your portfolio solely on hands-off asset classes you may be at a disadvantage in terms of being able to qualify what is good and what is not. Having real-world hands-on experience is a must and is vital for any investment decisions you make going forward. You could say that about most things in life!