The Myth of “Passive Income”, Shattered

Every investor guide and/or property marketer tells you that if you invest in real estate, passive income is guaranteed. You just need to buy the apartment in Dimona or Lisbon and the money will simply flow into your bank account. Really?… You should read Talia’s story.

Talia and her husband, a young couple just starting out, wanted, like every young Israeli couple, an apartment of their own. They went to housing fairs and entered the subsidized-housing lotteries, but nothing worked. They didn’t win the lotteries, and buying an apartment became a dream that moved further away every month as prices rose, especially after a good friend explained to them in great detail one Friday evening how an apartment, even for one and a half million shekels in the periphery, would end up costing them 2.5 million or more because of the mortgage, and suggested they look into buying an apartment abroad instead.

“A friend connected us with someone who described himself as an investor guide, and later I realized he was just an agent clipping coupons off me. A nice man who took 1,500 euros from us for a process of accompanying us to buy an apartment in Bucharest,” Talia told me at our meeting.

“We bought plane tickets and flew with him for two very, very intensive days in Bucharest,” she went on. “On the first day we saw 5 or 6 apartments, and we noted the pluses and minuses of each one, but we didn’t really understand where each was located in terms of the city’s areas. The next day he had us meet a lawyer and also took us to the bank, where we opened an account.

When we got back to Israel he started pressuring us to make a decision, and we met again one evening at our place, and he steered us a bit more. In the end, the apartments he showed us were all at the top end of our budget, but we decided to go for a particular apartment and moved ahead with checking it with the lawyer he had introduced us to. We transferred the money, and I flew with him for one day to sign the agreement. After the signing we did a marathon of meetings with all sorts of management companies and/or Israelis living in the city, whom he invited so they could offer to manage the apartment for us.”

“And didn’t it seem strange to you that he was doing all that for 1,500 euros?” I asked.

“We were already in the middle of the process, so it didn’t really matter anymore,” she replied. “I came back to Israel, and after talking it over with my husband we decided to go with one of the management companies. I contacted them by phone, and about a week later I got a detailed email from them saying the apartment needed renovating and refitting before tenants could move in, and their quote was 25,000 euros. On the phone, the manager of the management company explained that they really needed to strip the whole apartment and rebuild it before furnishing it and bringing in a tenant. That sounded strange to me, because I didn’t remember the apartment being in such a catastrophic state, but after a day of consultations I gave him the green light to start the work, and at the same time I bought a plane ticket to Bucharest.”

As you’ve already realized, this was Talia’s third trip to Bucharest, which means the young couple’s expenses just kept growing, and they hadn’t yet seen any of the income they had been promised would be passive.

Talia ended the contract with the management company the day after she arrived in Bucharest, when she learned from the site foreman she found in the apartment that the renovation ordered from him was far less extensive than what had been described to her on the phone, and far from what was written in the quote sent to her. After an exhausting negotiation she had to pay the management company 3,000 euros in compensation and hire a renovation contractor directly to finish the work. While the work was going on, she bought furniture and fittings for the apartment and looked for a new management company. Talia spent two weeks in Bucharest for this, but by her account saved 10,000 euros compared with what she would have paid the first management company she had hired.

With the experience she had gained, she decided to hire an Israeli guy she knew to handle renting and managing the apartment. “Everything was fine for the first six months. He sent us a lease signed with a Romanian student, he said, who paid 400 euros a month, even though we thought, and it had been presented to us all along, that an apartment like that should rent for no less than 500 euros a month. But since we had already sunk much more into it than we had planned and wanted to see the apartment working, we compromised,” Talia says.

After six months the manager she had hired told her the student had disappeared from the apartment and left a small debt to the electricity company and the residents’ association. Two months of summer vacation went by before a replacement tenant was found, who signed a one-year lease, also for 400 euros a month. The new tenant stopped paying the rent after two months, and the manager also cut off contact with Talia, who had to buy yet another plane ticket to Bucharest.

“I got to Bucharest toward evening, and after checking into the hotel I asked for a taxi to the apartment. When I gave the receptionist the address so he could order the taxi, he asked me what I was looking for in that area. I didn’t understand the question, and then he explained that the address I had given him was in an area where mostly foreign workers live, and it isn’t pleasant to walk around there alone at night, certainly not for a foreign woman. I was in shock. By the time I got there it was already dark, and I understood what the receptionist had been talking about. There was hardly a soul on the street, and the people I did see were mostly foreign workers or homeless.

I rang the intercom and introduced myself as the owner of the apartment. After a few minutes a young man came down who didn’t look like a Romanian student but more like a foreign worker from the East, and introduced himself as living in the apartment. I went up with him to the apartment, where he lived with another 4 foreign workers from the East. They explained to me in broken English that the guy they had rented the apartment from used to come every month to collect the rent in cash, and for the past two months had stopped coming. The next morning I went back to the apartment and got the payment for the previous two months from them, and I also gave them our bank account details so they could pay directly into the account every month.”

Talia’s story isn’t the only case I’ve come across, even if it’s relatively unusual and involved a great many mishaps along the way. Still, many investors I’ve met over my years of accompanying them will tell you there’s no such thing as “passive income”. There is “active work” meant to protect and preserve your investment. Here are a few tips for managing it smartly:

• Before buying, even if you have professional guidance, make sure to carry out thorough checks of the property, including a physical inspection, a legal check of ownership and permits, and a financial check of the rental potential and future value.
• Research in depth the real-estate laws, tenancy laws and relevant regulations in the country where you bought the property.
• Be aware of differences in business culture and local working practices.
• Use online communication tools (video calls, email, messaging apps) to stay in continuous contact with your local partners (the management company, the lawyer, the accountant).
• Even if you use a management company, it’s a good idea to visit the property from time to time to see its condition for yourself and stay in touch with your local partners.
• Make use of digital platforms for managing properties remotely, which can include tracking payments, maintenance requests and communication with tenants.
• Take out comprehensive property insurance suited to the specific conditions and risks of the country where the property is located.

“Academic analysis of the performance of cross-border real-estate investments indicates that proper remote management of the property, relying on professional local partners and maintaining effective communication, is a key factor in achieving positive returns and minimizing risk.” Dr. Emily Carter, real-estate researcher at the University of Cambridge.