What Is An Absentee Owner And Why Does It Matters In Real Estate Investing
Carey Chesney6 minute read
September 29, 2021
When it comes to investing in real estate, the possibilities are endless. Most people will do some type of real estate investing over the course of their lives, even if it just entails buying a home, paying off the mortgage, and selling it at a higher price when it’s time to move. But there is a myriad of other ways to invest in real estate as well. One of these is in the form of being an absentee owner who buys and sells properties that provide equity when they increase in value, income through collecting rent while they are owned, and cash when they sell.
What Is An Absentee Owner?
The term absentee owner refers to a person or corporation, oftentimes a property management company, that owns residential or commercial real estate without actively managing or residing in it. Absentee owners are often highly sought out by real estate professionals and investors, as they’re often motivated to sell their vacant properties.
The term is primarily intended to distinguish between property owners that are hands-on with their investment versus those who are largely hands off. So, if you buy a rental property and manage the maintenance, rent collection and other day to day tasks, you are simply a real estate investor and a hands-on landlord. Heck, you may even live there too. But if you buy a property and take a completely hands–off approach to managing it by outsourcing those tasks to a property management company or other employees, you are an absentee landlord.
Another term you may hear related to this is real estate investment trusts (“REITs”), which allow individuals to invest in large-scale, income-producing real estate. As opposed to developing real estate properties to resell them, REITs usually invest in buildings to operate them as part of the investment. This can include shopping malls, apartments, hotels, self-storage facilities, and warehouses, just to name a few.
What’s The Difference Between Corporate Vs. Residential Absentee Ownership?
To make things a little clearer in this complex landscape, it’s important to note that absentee ownership in residential rental properties is different from corporate absentee ownership. A corporation may manage several properties all over the country, or the globe, working to maximize profits for a number of investors or stockholders in the company itself.
In contrast, absentee business owners working with residential properties tend to be individuals who do not live near enough to their investment property to actively manage it. They might live in the same city or on the other side of the world, but for whatever reason they logistically can't, or don’t want to, manage the properties they have purchased for investment purposes. These individual absentee owners often use a third party to manage their properties, with there being a number of property management companies available to choose from no matter what location they are in.
Is It Easier To Buy Property From An Absentee Owner?
It can be. In fact, some real estate agents and prospective buyers choose to seek out absentee owners when buying commercial or residential property. This happens because buying from an absentee owner can be a great investment if they’re a motivated seller. Why? Well, here are a few common reasons:
- Absentee owners can often become tired of owning their property, especially if they have problematic tenants.
- They may not be getting the return on investment they want given the rent amounts or expenses.
- They may be frustrated with new rules and regulations placed on landlords.
- High property prices can often be attributed to the owner’s emotional attachment in the home. Absentee owners are less emotionally attached, seeing the property as an investment, not a family home, so they will often sell for less.
- Absentee owners may be heirs who inherited the property and aren't really interested in being absentee landlords.
- They may see other new investment opportunities that they would rather put their money in.
Since absentee owners represent opportunity for real estate agents and investors, there are a number of tactics they use to find them and see if they are willing to sell. These include:
- Driving around and finding rentals that seem to be unoccupied or with rudimentary signage in terms of rental vacancies. This can include short term, long term and vacation rental properties.
- Using sites like Airbnb and VRBO to find short term rental listings with owners who may be interested in selling.
- Reviewing the local county assessor's website for tax records. This can be time consuming though, as there usually aren't lists available of all the absentee owners.
- Buying lists of absentee owners in their service area. There are a number of companies that sell and resell these lists to real estate agents and investors.
What Are The Advantages And Disadvantages Of Absentee Ownership?
Becoming an absentee owner to help diversify your real estate investments or to get into the real estate investment space for the first time can be very appealing. That said, owning and managing the property yourself presents its own set of benefits as well. And like all things, there are different challenges with each approach. Let’s take a look at a few key pros and cons of absentee ownership with a keen eye toward factors that affect your potential revenue when comparing passively renting properties versus actively managing them.
Pros of Absentee Ownership:
- Unlimited Geography: Absentee owners don't need to be located near the properties they own. This allows them to focus on hot real estate markets around the country and even the world, regardless of where they hang their hat. Real estate markets vary greatly by state, city and even neighborhood, so living where you want without regard to its proximity to your investment properties is appealing. In addition, markets fluctuate based on geography, so being an absentee owner means you can pull investment dollars out of one area of the country and put them into another without moving your primary residence to be close to them.
- Passive Income: Absentee owners outsource a lot of work including maintenance, repairs, tenant communications, rent collection and more. This means they have more time to live their lives the way they want to, in addition to where they want to. From a business perspective, delegating the work involved with managing their investment properties allows time to work on other business ventures, all while collecting the income from their properties passively.
Cons of Absentee Ownership:
- Hiring People: Finding competent and trustworthy employees and property managers can be a real challenge for absentee owners. When you actively manage your property, you know that all the day–to–day decisions will be geared toward making the most out of your financial investment. When you put your faith into someone else to take care of it, you often can’t be so sure. If you do find the right people to manage your investment properties for you there is still a cost you incur when you pay them to do the work, so that money spent is a con of absentee ownership to consider as well.
- Communication Struggles: When you aren't physically located in the same area as your investment property, it can be hard to keep your finger on the pulse of what’s going on. This can strain relationships with employees, tenants, local municipalities and other various clients and business partners.
What Are Some Tips For People Looking To Become Absentee Landlords?
If you’re hoping to become an absentee owner and rent out your property to tenants, you will need to carefully consider your plan of action. Here are some tips:
- Work with a local REALTOR® who can ensure you find the right property at the right price.
- If you need to repair the home before renting it, keep the 70% rule in mind.
- Carefully consider who will maintain the property and the cost to do it.
- Never stop reevaluating the investment to see if it continues to be worthwhile.
The Bottom Line: Weigh The Pros & Cons of Absentee Ownership Before Diving In
Absentee ownership can seem like a great way to make passive income without too much day–to–day work. In fact, the vision of sipping an umbrella drink on a beach or spending time with your family as the money rolls into your checking account might be floating around in your head right now. While that certainly can happen, setting up the right plan and then implementing it effectively is the only way to increase your chances of getting there. And remember, things can go south too. Lack of communication, not finding the right people to help you manage things and getting into markets you don't understand can result in a ton of headaches and not a lot of income. Rely on experts, make a plan and stick to it to set yourself up for success. Finally, always stay informed and never stop learning more about how to invest in real estate before diving in as an absentee owner.
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