Active Versus Passive Real Estate Investing – Which Is Best For You?
Did you know that you could invest in real estate without ever having to be a landlord?
Without ever having to go find the deal, negotiate the contracts, fund the deal, or take care of the property?
Pretty awesome, right? But it’s true – you can passively invest in real estate, reap all of the benefits that real estate ownership affords and you never have to be a landlord.
In this article, we’ll explore what it means to be a passive investor and what it means to be an active investor, and you will hopefully understand better which path is right for you.
What Does It Mean To Be An Active Investor?
As an active investor, everything falls on your shoulders. You are responsible for the property at every stage from acquisition to management to disposition. It may sound pretty easy to just buy a rental property, locate a tenant and sit back and collect “passive income”. But ask any landlord, and they will tell you that there is A LOT of work that goes into being an active real estate investor taking care of rentals and tenants. Even if a landlord has their properties professionally managed, the landlord still has all of the financial obligations, must still manage the manager and take on all of the risk.
What Does It Mean To Be A Passive Investor?
On the other hand, with passive investing, you simply invest your capital and let someone else do all of the work on your behalf. You simply receive checks monthly or quarterly – that’s it. No work involved at all on your part.
Passive investing has so many advantages – because it’s passive, you don’t have to deal with any day-to-day management of the property, no toilets or termites. No property managers to manage, no tenants to screen, no repairs to make, no insurance claims to file. Nothing to do, but collect your distribution checks. That’s it – truly.
Now being a passive investor also means you have to trust the sponsor to manage the property well, so you do relinquish control over to the deal sponsorship team who will be executing the operations on your behalf.
Should You Be a Passive Investor or an Active Real Estate Investor?
Here are 8 factors that will help you determine if you should be a passive investor or an active investor:
#1 – How much time do you have?
As an active investor, your investments will require a substantial amount of time not just during the acquisition phase but during the entire hold term. As a passive investor, your time commitment is in the early stages of researching the investment to see if it is a sound investment, but beyond that, you don’t have any more work involved in the investment.
#2 – How much involvement do you want?
If you like control, then being a hands-on active investor may give you more gratification, but just remember you will need to be involved with the property frequently even if you have a property manager. And you are at full financial risk as an active investor. On the other hand, as a passive investor, you invest and then rest while others work on your behalf.
#3 – What type of profits are you looking for?
Being an active investor will allow you to keep most if not all of the net profits – that’s pretty compelling. As a passive investor, you will be splitting the profits with all of the other investors who have invested in the project.
Remember, time is money also. So if you’re busy being an active investor, you have to factor in what your time is worth.
#4 – Would you rather not deal with expenses throughout the lifecycle of a project?
As an active real estate investor, you will always have to factor in the cost of maintenance and repairs, insurance claims, and emergency situations, which will cost additional funds and reserves to cover. Passive investors, on the other hand, only have their initial capital investment.
#5 – Are you risk-averse?
As an active investor, you are held liable personally if anything goes wrong with the property or the tenant, which could mean you not only lose the rental, but you could potentially lose your personal assets as well.
As a passive investor, you have a limited liability – thus you are a limited partner (LP) in the deal, and your liability is only limited to the capital you have invested in the deal. If something were to go very wrong, the deal sponsors or (GP’s) would be held liable, not the passive investors.
#6 – How do you feel about paperwork?
As an active investor, you are responsible for quite a bit of paperwork; bookkeeping, accounting, legal documentation, tax documents, contracts, and rental lease agreements during the hold term of the investment.
As a passive investor, you are responsible for reviewing, having an understanding of, and signing the PPM (private placement memorandum) so that you are able to invest in the opportunity. You won’t need to take care of any of the bookkeeping, insurance, lender documents etc., the sponsor team handles all of that for you.
#7 – Do you want to build a team or have a team ready to work for you?
Active real estate investors will need to develop their own team members such as a good property manager, real estate brokers, insurance agents, inspectors, contractors, and mortgage brokers.
Passive investors, on the other hand, alread have a team in place. The deal sponsor has the expertise, knowledge, research, and a team in place to handle all of these jobs and functions for you.
#8 – Would you want to be responsible for income and expense tracking or … not really?
Active investors are responsible for all of the expense and income tracking as well as having their CPA implement a depreciation schedule for the property so that the accounting and bookkeeping can be done accurately and timely.
Passive investors don’t need to do any expense and income tracking for the property. They receive a Schedule K-1 that outlines the income and losses for the asset. All of that work is done for them.
If you’re ready to tackle all of the roles and tasks that I mentioned earlier as it pertains to the responsibilities of an active investor, then active investing and being a landlord may be just your thing.
However, if you value having the freedom to have your money work for you instead of you working for your money, then passive investing may be just the path you may want to explore – especially if you have little time already in your day.
When trying to determine which avenue is best for you, always consider your goals and the timelines for those goals, and that may just help you decide which path is best for you.
Until next time…Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about passive investment opportunities in commercial real estate syndications is to join the PCRP Passive Investor Club.
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.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!