15 Jul How to Decide Whether to Be an Active Investor or a Passive Investor
What a dream opportunity, right?
That’s what my husband and I thought when we first heard about passive real estate investing. In this article, I’ll go over the questions you may want to ask yourself before you become either an active investor or a passive investor to help you gain clarity on what would be a better fit for your life at this time.
Our Personal Experience As An Active Investor
When my husband and I were first presented with this idea of passive investing with real estate syndications, we had already been actively investing in various types of real estate for quite some time. We had done everything from fix and flips, and buy and holds and short sales and wholesales and lease options, and a variety of other investment strategies in between. We had done it all. And, man, was it a lot of work!
Even though we eventually had our properties professionally managed, it was still a lot of work finding more properties, fixing them up, and managing the managers. So, what we learned was as an active investor, you’re still doing work – it’s not a completely hands-off endeavor by any means.
I was the type of person who felt like I had to do it all. I’m a terrible delegator, but it just wore me out. I’ll be honest. So, when we had heard we could have all of the benefits of real estate ownership (returns, tax advantages, having a tangible asset) without ever having to do any of the work ourselves? I was sold!
Our Experience Becoming A Passive Investor
A whole new world opened up to us when we found out more about passively investing in real estate syndications. Today, knowing what I know now, I would not be an active investor for the reasons that I mentioned earlier, but also because of what I learned about passive real estate investing.
Passive real estate investments are the type of investments where I can bring in capital and invest alongside a great deal sponsor team who have the experience, knowledge, and extensive track record to successfully conduct the day-to-day management of my investment. I just collect the distributions, and all I did was stroke a check.
If you want a ‘set it and forget it’ type of investment, you may want to explore real estate syndications.
I’ve been asked: “But as a passive investor, don’t you get lower returns than that of an active investor?” Yes, of course, I do, but what is your time worth? More importantly, what is your freedom worth to be able to spend your days exactly how you would like? It’s a trade-off, right? As with anything, you have to conduct a cost/benefit analysis on your time. Time is a non-renewable resource, money is not, so I choose to passively invest so that I can capitalize on my non-renewable resource: time.
Should You Be An Active Investor Or A Passive Investor
Maybe you’re not quite sure which lane you should pick at this point. You might be thinking you want to try your hand at a fix and flip or maybe you want to own some rental properties because being a landlord doesn’t sound so bad to you.
I will say, I learned a lot from my active investing, so if it’s something you want to try, I would definitely encourage you to do it with the proper education and guidance because there is a lot more risk with active investing versus passive investing. You may be in the earlier stages of getting started in real estate investing and that’s ok. It’s good that you’re educating yourself.
I totally get it. There are so many things to consider, and determining the best ways to invest your money can be a complicated endeavor.
So that’s why I put together a list of factors you should consider in your quest to decide if being an active investor or being a passive investor is a better fit for you.
#1 – Do You Want To Be A Landlord?
There are upsides to being a landlord and some downsides as well. I don’t want to discourage you if that is something you want to do. I just want you to understand that it can be quite a bit of work. If you like the idea of locating your own properties and submitting and negotiating contracts, financing, funding, fixing up properties and screening tenants, conducting repairs and maintenance and handling all of the legal paperwork, then you should definitely give being an active investor a shot.
If, on the other hand, that laundry list of tasks just made you fall out of your chair, then maybe being a passive investor is more up your alley.
#2 – How Much Time Do You Have?
You have to be honest with yourself even if you want to be an active investor, do you have the time to do it and do it well? Because this is your investment. You will need to be honest with yourself about how much time you have to devote to being an active investor. Active investing requires a time commitment not only to acquire the properties but to manage the properties throughout the lifecycle of the investment.
On the other hand, with passive investing you conduct your due diligence upfront when you receive the notification of the opportunity. You will want to do some research and vetting of the sponsors and the market, but once you have decided to invest, your work is done. You just invest…and rest.
#3 – How Much Involvement Do You Want?
As I mentioned earlier, I am a bit of a control freak, and I feel like I have to do everything because I just can’t delegate well. But after seeing how well my capital can be taken care of while I have the freedom to do what I want to do is the path I’m definitely welcoming at this stage of my life. I’m perfectly happy leaving the heavy lifting to others while I plan my next adventure.
Active investors get to make the day-to-day decisions. Passive investors put their trust in a professional to handle those things.
You just have to decide what level of involvement you are most comfortable with, and that can help you decide which type of investor is a better fit for you.
#4 – How Much Profit Do You Want?
When you are the active real estate investor you receive more of the profits because you are doing more of the work, fair enough right? You should be rewarded more for putting in more of the time.
In contrast, passive real estate investors share in the profits with the other investors who have invested in the syndication.
This doesn’t necessarily translate to a lower return for the passive investors compared to that of an active investor. The returns on any investment are dependent on so many factors such as the deal itself, market location, sponsor team, debt terms, and various other considerations.
#5 – How Do You Feel About Expenses?
Active investors will need to set aside adequate reserves for emergencies, unforeseen complications, potential tax and/or insurance hikes, and for anticipated repairs and maintenance in general. There are always ongoing expenses that you need to plan on when you have your own properties. Keep in mind that some expenses can be considerable in cost.
For example, some years ago when we first started buying and holding single-family homes, we had a tenant in one of our rental homes that was cooking methamphetamines, and the cost to remediate that issue was almost $40,000. That was a huge hit to our bottom line, as you can imagine. But you really do have to plan for such unexpected and unfortunate situations.
In most instances, passive investors only need to put their original capital into the asset during the hold term of the project. If, for some reason, the capital reserves that are set aside for such emergencies by the deal sponsor team do not cover an unexpected large expense, then you may experience lower returns for a bit, but it is very unlikely and very rare that you will ever need to put additional capital into the project.
#6 – What Is Your Risk Tolerance?
When all is well with the tenants and the property that you have invested in as an active investor, then nothing to worry about right? But when something crops up that can disrupt that equilibrium, it can be devastating.
As an active investor, you will want to make sure you consult with an attorney to discuss asset protection strategies before you purchase any assets. You will want to be structured in such a way that your assets are protected as much as possible from lawsuits launched by tenants or others. This is a very real risk that could cost you your personal assets if you are not protected well.
Passive real estate investors have limited liability. They are invested in an LP or an LLC that will be holding the asset, so because a passive investor is a “limited partner” in the project, in the unlikely event that everything goes awry, then the absolute worst thing that could happen is that your original investment could be at stake, but no other asset would be at risk. That’s important to know and understand.
#7 – How Much Diversification Do You Want?
Diversification is probably one of the biggest advantages when passive investing. As a passive investor, you aren’t involved in any of the day-to-day time commitments and as such you have more time, so you are able to invest in many more assets, whereas the active investor is limited by how much time they have in a day acquiring and managing their own assets.
Additionally, as a passive investor, you are able to diversify your investments anywhere in the world – really. You are able to leverage other people’s time, energy, expertise, market knowledge, and solid team structures in the markets that you are investing in.
Active investors, by contrast, will need to be well versed in every real estate market and submarket they are investing in as well as be exceptionally knowledgeable about the asset class they are investing in as well. Their ability is very limited if they want to diversify too much into other real estate markets.
So now that you have a better understanding of what is required in being an active or a passive real estate investor, I hope that this has helped you start working in one direction or another on your journey to successfully invest in real estate in general.
We, of course, are big proponents of the passive income model as it pertains to investing in real estate syndications. We believe that passive investing is an outstanding way to have steady passive income (without having to do any work), a way to build legacy wealth for your family, and impact the communities that you serve by investing in safe, clean, affordable, and much-needed housing options.
Either way, just start looking into the possibilities that come with real estate investing, I think you will be glad you did. I hope this article helped you get a bit closer to understanding how to Earn Passively & Live Abundantly!
Until next time….Earn Passively & Live Abundantly!
Ready to Learn More?
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Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
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