This article is an excerpt from our no cost Ultimate Guide To Passive Investing. You can download the full guide here.
Active vs Passive Investing – Comparison
Deciding what kind of investor you want to be
Now that you know the benefits of investing in real estate, you need to decide how hands-on you want to be.
- Hands-on investors are called Active Investors. If this is your speed, you’ll want to explore rental properties or flipping properties.
- Hands-off investors are called Passive Investors. If this speaks to you, you should consider investing in a real estate syndication.
Let’s Dive Deeper
Before you invest your first dollar, it’s important to understand what role you’d like to have in the investment. This starts with understanding if you want to be an active or passive investor.
An active investor is someone who has an active role in the investment, and a passive investor is someone who takes a passive role, letting others do the active management on their behalf.
When people think of real estate investing, traditionally they are thinking of buying a rental property.
Having $50,000 to invest, they can buy a rental property up to $200,000. You use that $50,000 towards the down payment with a $150,000 loan. You then manage the property yourself or put a manager in place who helps you find tenants and collects rent each month.
If something breaks, like the furnace, you’re responsible for the repair. When the tenant moves out, you’re responsible for finding a replacement.
The upside is you get to keep all the profits, decide whether to make upgrades or how long to hold the asset, and when to sell. You are in control.
For those who want to invest in real estate but don’t want to deal with the hassle of being a landlord, there are passive real estate investors.
Here, rather than buying the entire property with your $50,000, you put $50,000 into a group investment. Multiple other investors just like yourself put in $50,000, $100,000 or even more into the investment pool.
Together, instead of a single-family rental property, the group of investors buy an apartment building.
As a passive investor, you put in your money, and that’s the end of your active role in the investment. You don’t have any other responsibilities. You get to focus on your life and your career.
The general partners (aka the sponsor team) handles the purchase, the day-to-day management of the asset, the paperwork, and any maintenance issues. They also decide when to sell and are responsible for leading the process.
For the life of the investment, you get monthly or quarterly cashflow distribution checks. At the end of the whole thing, you get your $50,000 back, plus a share of the profits from the sale.
All without having to do any work.
That leads to the main difference. Active investors have all the control, but all the responsibility. Passive investors give up control in return for not having to do any of the work.
Q: Which option is best for you: Active Investor or Passive Investor?
A: There is no right or wrong answer. Depending on where you are in life, that path may change. I’ve certainly been on both sides and have experienced the benefit of active and passive investing.
Three Factors That Contribute To Going Active or Passive
- Are you busy with your full time job or other commitments but you’d still like to receive the benefits of investing in real estate?
- Are you interested in investing in real estate, but lack the capital or experience to confidently invest on your own?
- Are you comfortable with others making business decisions for your investments?
Depending on your answers, it should be clear what is the right decision for you right now. Oftentimes for those interested in investing actively, starting out as a passive investor can help you build up the skills and understanding of acquisitions, management and disposition process of a property. However if you answered no to #3, you may have a hard time investing passively. General partners typically have 100% control over the business plan, meaning as a passive investor you’re giving up direct control.
This article is an excerpt from our no cost Ultimate Guide To Passive Investing.