Are You an Active or Passive Real Estate Investor?
Real estate investors typically fall under one of two headings: active and passive. Since both of these options have their own list of pros and cons, real estate investors are often split on which type of investing is the best choice for them. Deciding between active and passive real estate investing is largely contingent on how involved you want to be in the process. What ultimately matters is that you receive a positive return on your initial investment and build a successful real estate investment portfolio.
Active Real Estate Investing
If you’ve watched any of the house flipping shows that have become so popular in recent years, you’ve seen an example of active real estate investing. Investors who purchase a property and then perform repairs and upgrades to it before selling it for a higher price or renting it out are said to be “active” in their investment. Additionally, if you purchase a rental property, whether it’s commercial or residential, and handle the property management responsibilities yourself, you are actively investing in the property. Essentially, active investing sees the investor not only invest money at the beginning of the process, but they also invest sweat equity and their own time in ensuring that the property is profitable.
The primary downfall of active real estate investing is the amount of time that is involved in the process. House flipping can quickly become a full-time job as even the most minor of renovations can take a considerable amount of time. Many investors who want to build a large, diverse portfolio don’t want to spend 40 or more hours a week working on a single investment property. Additionally, if you serve as your own property manager, you may spend much of your time performing repairs and keeping tenants happy instead of building your portfolio.
However, active real estate investing also has its benefits. First of all, you are in more control of the success of your investment. Some investors are not comfortable with the concept of spending a large chunk of money on an investment property and then letting someone else handle the upgrades and renovations. Active real estate investment allows you to be in total control of how every dollar is spent. Active real estate investors also enjoy the benefit of personally selecting every property that they invest in unlike passive investors who are usually part of a larger investment firm.
Passive Real Estate Investing
Passive real estate investing allows investors to put their money up while someone else does all the actual work. Passive investors have multiple options including real estate-based mutual funds, real estate investment trusts (REITs) and simply outsourcing the work that is necessary for real estate investing. Real estate investors who have amassed even more personal wealth also have the option of investing in a real estate syndicate that accepts private placements. While all of these investment options have some differences, there is one thing that is common across the board: someone else manages the money that you invest.
The biggest drawback of passive real estate investing is the lack of control you have over your funds. Since you are not the one who ultimately decides when a property sells or how much it goes for. Instead, you are at the mercy of the person or committee who makes those decisions for the firm that you have invested through. Also, you will receive a smaller portion of the profit. Since most passive real estate investments have a number of investors, all the profits have to be split among them. For instance, if there are five investors on a property that earns $75,000, each investor is entitled to $15,000. If you are an active investor and flip a home that produces a $75,000 profit, the full amount belongs to you.
The most glaringly obvious benefit of passive real estate investing is found in the fact that it is a safer investment option. Since you will be pooling your money with a group of other investors, you not only have to put up less money, but you will also build a more diverse portfolio made up of multiple properties. Also, some passive real estate investment opportunities allow you to invest in multiple properties for less initial capital than a single property may cost an active investor.
The most important thing about your real estate investment is that you consistently see a positive return on your investment. Whether you do that by actively involving yourself in every aspect of your real estate investment or you put up the money and let other professionals manage the technical aspects, you can build a healthy investment portfolio through real estate investing.