Active vs. Passive Real Estate Investing - Which One is Best For You?
If you’ve decided that incorporating real estate into your portfolio is a good idea (hint: it is!), the next question you have to answer is: should I be an active or a passive investor? There are pros and cons of each approach but let’s start with a definition of each:
Active investing is when an investor personally finds, purchases and manages a property for rental cash-flow and appreciation. Usually, the property is in the same local market as the investor, however, it could also be a non-local Turnkey property that is utilizing a property management company. In addition to managing the investment, the active investor is also personally liable for the property and the associated mortgage. The process of identifying the correct market, property and executing on the investment strategy is time-intensive but very rewarding if all goes to plan.
Passive investing is a hands-off, no-hassle approach to real estate that enables an investor to fund a real estate syndication that is managed in its entirety by an experienced sponsor. Because funds are pooled together from multiple investors, syndications can access lucrative assets such as multi-family apartments, self-storage units and mobile-home parks. Investors not only outsource the selection and management of these investment properties, but they also limit their liability by not having to personally guarantee the investment or have a mortgage on their personal balance sheet.
Now that we’ve defined the terms, let’s dive into the main factors to determine which strategy is best for you.
The first question you need to answer is whether you have the significant amount of time required to actively find and manage a real estate property. This will not only include the time to research, vet and acquire the property but also the ongoing property management. As busy professionals, time is already scarce so ensuring you can carve out the needed time for your active real estate investing is critical.
Passive investing on the other hand is hassle-free as the activities above are outsourced to the sponsor of the syndication. You simply provide your initial investment and monitor the monthly/quarterly distributions until the property is sold.
2. Desire (Tenants, Toilets and Termites)
If you determine that you have the ability to invest significant time into active real estate investing, the next question to answer is whether you have the desire to deal with a landlord’s least favorite three words: Tenants, Toilets and Termites. If these three words don’t make you want to run for the hills, then active real estate investing could be for you! As any experienced active real estate investor knows, it's not a matter of if these issues will arrive, it's when, so being prepared to deal with difficult tenants, broken toilets and termite damage (along with many other unforeseen issues!) is imperative.
Passive investing once again avoids these headaches as the on-going management of the property and tenants is handled entirely by the sponsor of the syndication. As a passive investor, you will be able to review and monitor the operating reports from your investments in a hands-off manner.
The last factor to consider if you have the time and desire to actively manage real estate investments is whether you have the expertise to execute on a business plan and achieve the desired returns. This will also involve finding, vetting and managing a number of team members (broker, attorney, accountant, general contractor, property manager etc.) in order to be successful. Keeping all of these tasks and people aligned is key to achieving your desired investment goals.
Investing in passive real-estate syndications enables you to leverage the experience of a sponsor and team of experts that specialize in creating and executing on the specific business plan needed for each investment property. This involves analyzing the best markets and sub-markets, finding underperforming properties, forcing equity through “value-add” and operational improvements, and ultimately selling the property at a premium.
There are many ways to become a successful real estate investor and different strategies work well for different people. The decision on whether to be an active or passive investor boils down to whether you have the time, desire and expertise to manage the entire real estate investing process vs. enjoying the benefits of real estate investing in a hands-off, no-hassle way. As investors in both strategies for many years, we’ve found the passive approach to be far superior with considerably less effort.