Passive or Active?

Category:
Real Estate Investing 101
|
By:
Yannik Cudjoe-Virgil

There are many ways to invest in real estate. Some ways are passive and others are active. There are pros and cons to each strategy but success can be achieved either way. It's important to weigh those pros and cons and choose the strategy that's best aligned with your passion, expertise, time, and investment goals.

Here are some key points to consider when making that choice.

Active Investing

An active investor's role can be quite challenging and requires a compelling amount of education, experience, and expertise. Real estate is a team sport and requires you to perform a substantial amount of upfront work and daily activities before you are able to identify and secure an investment opportunity. Tasks include market research, sourcing deals, negotiating contracts, and identifying key team members (contractors, property managers, attorneys, etc).

When the property is under contract, the active investor is required to manage the transaction, perform due diligence, and consult with relevant parties (mortgage brokers, insurance brokers, title companies, inspectors, etc). Once they close on the property, they are also responsible for executing the business plan.

If you are able to devote countless hours to education and experience in real estate investing, active investing may be your route. Your success as an active investor will depend on your level of commitment and discipline in conducting the routine management activities, implementing industry best practices, and maintaining an effective, high-quality team of vendors.

Passive Investing

A passive investor's role is solely to invest capital into a given real estate project. They defer the decision making and management authority to trusted and experienced sponsors. The sponsors are responsible for executing a business plan behalf of the passive investors and delivering returns for them.

Passive investors are limited partners in the business while the sponsors serve as general partners.

As limited partners, passive investors have limited legal liability. The capital that the passive investors have invested is all they have at risk.

Sponsors leverage their track record and experience to provide better investment opportunities and deliver greater results than a passive investor may be able to access on their own.

A passive investor is able to forgo the ongoing demands and responsibilities of managing their investment. They simply receive monthly or quarterly updates, collect cash flow, and benefit from the tax advantages that direct ownership in real estate provides.

If you are a busy professional, seeking real estate investments that offer higher risk-adjusted returns with more predictability and less volatility compared to traditional stocks, then passive investing may be a more favorable route. It allows you to focus on the other obligations and passions that you prefer to occupy your time with.

Summary

There are multiple ways to successfully invest in real estate. Passive investing is a great way to achieve returns on your investment capital without the burden of being involved in day-to-day operations. Active investing can create similar returns on your investment, but requires you to spend time acquiring and managing your properties. It is important to understand your investment goals and select an investment strategy that is aligned.

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