Active Vs Passive Real Estate Investing: The Difference
Real estate investments have proven to be one of the most non-volatile sectors of traditional investment options. As such, more people are looking into putting their monies into real estate investments. Rightfully so, seeing as the industry continues to generate high returns.
When it comes to real estate investing, you can choose to go all hands-in or allow your money to work for you while you sit and watch. This is to say, you have the option of either being an active or passive real estate investor.
What Is Active Real Estate Investing?
If you have the capital and set out on your own to find real estate investment opportunities by doing your research and settling on which is best for you without the help of any professional, then you are an active real estate investor.
Active real estate investing is therefore buying real estate properties, monitoring and managing the property, and enjoying the yields that come with it after renting out or reselling.
This capital invested here can be from an individual or a group of people. He or she or they have the responsibility of overseeing all processes concerning the property and whatever decisions need to be taken rests mainly on the investor or investors.
What Is Passive Real Estate Investing?
Some people rely on others to present viable real estate investment opportunities to them so they invest their capital there. Such people, after buying the property or properties, sit back and have almost no dealings in the day-to-day running of the property.
In an aspect of passive real estate investing, the investor can buy a property and hire a property management team or property manager to oversee the daily operations of the property.
In another aspect, a passive real estate investor can invest in a real estate syndication i.e. a group of investors. Here, the group will pool their capital and resources together and be able to purchase the property with the help of someone with skills like an active real estate investor.
Consequently, when dividends and profits are made, it is shared among the members of the syndication.
Passive real estate investors mostly rely on active real estate investors who have a track record of successful investment yields to research and bring to the fore promising real estate investment options.
Factors To Consider Before Venturing Into Active Or Passive Real Estate Investing
1. Amount Of Money You Are Willing To Invest
The amount of money you are willing to invest would influence your decision to enter active or passive real estate investing. Active real estate investing mostly tends to be more capital-intensive than passive real estate investing.
This is because, in active real estate investing, the investor or investors fund the entire process of buying, managing, and maintaining the property or properties and that could be draining on the pocket.
On the other hand, if you do not have enough money, you will have to partner with other investors or go into syndication which is a form of passive real estate investing.
2. The Level Of Risk You Are Comfortable With
The level of risk you are willing to take would also play a role in deciding whether you want to venture into active or passive real estate investing.
Active real estate investing has a higher level of risk when compared to passive real estate investing. This is because as an active real estate investor, you are solely responsible for the success or failure of the investment.
You are the one who will have to settle for a property after doing your due diligence and you will also be the one to monitor it to ensure it is up to standard. All these come with a certain level of risk.
On the other hand, passive real estate investing has a relatively lower level of risk as you are not as involved in the process as an active real estate investor and you can spread the risk by investing in syndication.
3. The Level Of Involvement You Are Willing To Have
The level of involvement you want to have in the real estate investment process would also help to determine whether you want to venture into active or passive real estate investing.
Active real estate investing requires a higher level of involvement from the investor as he or she would be the one to oversee all the processes. You would be the one to identify a real estate opportunity, carry out due diligence, and then purchase the property.
You will also be the one to monitor the progress of the property and ensure that it is up to standard. All these would require your time and effort.
On the other hand, passive real estate investing requires a relatively lower level of involvement from the investor as he or she would not be directly involved in the real estate investment process.
The investor can choose to invest in a ready-made real estate syndication or venture into a turnkey real estate investing opportunity where an already existing property is being sold with the aim of generating rental income.
The investor can also choose to invest in a real estate investment trust (REIT). These are some of the ways in which a passive real estate investor can invest in real estate without having to be directly involved in the real estate investment process.
4. Your Investment Horizon
Your investment horizon is another factor that would help you determine whether you want to venture into active or passive real estate investing.
If you are looking to generate income in the short term, then active real estate investing would be a good option for you as you can quickly turn around a property and sell it for a profit.
This is not the case with passive real estate investing as it takes time for a property to appreciate in value and generate income.
Passive real estate investing is more suited for those who are looking to generate income in the long term as it would take some time for the property to appreciate in value and generate rental income.
5. Your Knowledge In Real Estate Investing
Your knowledge of real estate investing is another factor influencing your decision to venture into active or passive real estate investing.
If you have a good understanding of the real estate market and the various factors that would affect the value of a property, then you can go ahead and venture into active real estate investing.
You would be able to identify good real estate opportunities and purchase properties that would appreciate in value in the future.
On the other hand, if you do not have a good understanding of the real estate market, then it would be better for you to venture into passive real estate investing.
6. The Experiences Of Others Who Have Been In Your Shoes
Finally, you should also consider the experiences of others who have been in your shoes and have ventured into active or passive real estate investing.
If you know anyone who has ventured into active or passive real estate investing, then you should ask them about their experiences and whether they would recommend it to others.
You should also read about the experiences of other investors online and see what they have to say about active and passive real estate investing.
This would help you to make an informed decision about which type of real estate investing you want to venture into.
Pros Of Active Real Estate Investing
1. Enjoy All Yields Accrued
Most if not all of the profits that are accrued from active real estate investing go to the investor. This means that after investing in the real estate asset, all returns will all go to the active real estate investor. These yields are usually high as well.
This is only fair as the active real estate investor took such a gamble on his own to search for, buy and manage a real estate asset on his or her own.
2. Easy Decision-Making
With active real estate investing, it is easier for decisions to be taken as it is the call of only the investor. Because there is no need to take votes when a decision has to be made, resolutions are reached within the shortest possible time. That does not mean that it will be the best decision but it may not too long to reach it.
Cons Of Active Real Investing
By the definition of active real estate investing, it is evident that one would need a huge capital to be able to invest. The processes leading to finding the real estate property and managing it can be financially draining. In essence, to be an active real estate investor, one needs to be financially prepared.
Being an active real estate investor can take up a lot of your time especially if you have not delegated others to undertake certain tasks on your behalf and you are doing everything yourself. From searching for the investment opportunity to finding and financing it and renting it out or reselling it amid preparing different contracts for occupants of the space, all of it will take up your time.
3. High Risk
Active real estate investors normally face high risks with their investments. Because all risks have to be absorbed by the investor, he or she feels every blow that comes with any dips that the investment may be hit with.
4. Skills May Be Required
If you will be in charge of finding, financing, and managing your real estate property, you must certainly be equipped with some skills. Among acquiring other skills, you must a great researcher, financial analyst, risk analyst, and property manager. If you do not know any of these fields, it would be best to hire someone for the job.
Pros Of Passive Real Estate Investing
1. Capital Can be Spread
In passive real estate investing, because it is not as capital-intensive, you can choose to spread your capital over various investments. Also, since there can be partnerships, the amount of money that would have been needed to finance a particular asset will be reduced because the total capital is shared among investors.
2. Less Risky
Risks in passive real estate investing are reduced firstly because they are shared among the partners and secondly because the investors who make up the syndicate, have the flexibility to share the capital across different investment options.
3. Not Time Consuming
Because the management of the real estate asset is not left to the investor, it does not require much of his time. This also means that no skills or level of expertise may be required of the investor.
Cons Of Passive Real Estate Investing
1. Less Control
As much the passive real estate investor is not bothered with the daily management of the asset acquired, it can be to his disadvantage sometimes. Certain issues may be handled without his knowledge and may be detrimental to the investment. In the long run, it may affect his dividend or profit.
2. Decision Making May Be Prolonged
Though a passive real estate investor has very minimal control after the asset is purchased, if there is ever a time when a decision has to be taken, it may be a long process if care is not taken. Take for instance, where there is a pool of investors and a consensus needs to be reached, it may take longer if some do not agree with others.
When it comes to real estate investing, there is no one-size-fits-all approach. The type of real estate investing that would be best for you would depend on your goals, investment horizon, knowledge of the real estate market, and the experiences of others.