Active vs Passive Real Estate Investing – 5 Factors To Consider
I recently spoke with a south Louisiana dentist about real estate investing. He graduated three years ago and recently completed the process of buying an existing practice.
His wife is also a dentist so they have a great income stream coming in.
I was impressed that he was focused on building long-term wealth and already developing an “exit strategy” so early in his career. He bought the practice from a 72-year-old dentist that was still working full-time.
He made sure I knew that he did NOT plan on working in his 70’s as it was likely that his hands and back would give out!
One of his questions had to do with active vs passive real estate investing. He had heard about real estate syndications but was also considering single-family homes.
For those that have a full time job and are considering getting into real estate, a great place to start is asking yourself whether the active or passive route makes more sense.
For most the answer is passive investing. Why?
Our BIGGEST wealth generator is our INCOME.
Think about how much time, money and energy you put in to get to where you are today.
Doctors spend anywhere from 7-12+ years post college along with racking up hundreds of thousands of dollars of student loan debt in the process. Their time is better focused on treating patients.
Once you start dealing with tenants and all of the maintenance issues that come with being an active investor, time has to be taken away from some part of your life (family, travel, etc.).
Whether you choose active or passive investing that’s up to you. My goal for you is financial freedom where you to get to the point where your passive income stream replaces the W2 or active income.
Real estate is a huge industry with multiple ways to get involved. It’s your job to find out which part of it will help you accomplish your goals.
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Active vs Passive Real Estate Investing – What’s the Difference?
In order to keep things simple, being an active real estate investor means that you’re taking a hands-on approach.
It’s typically more time consuming as you’ll have to deal with problems/issues as they arise.
On the flip side, passive real estate investing is more of a hands-off approach with limited control and time commitments.
Let’s take a more detailed look between the two.
What is Active Real Estate Investing?
Years ago a minor snow skiing accident (wrist) made me realize that I was depending ONLY on the dental practice income to provide for my family.
It’s funny how you never think about getting injured and all of the possibilities this could bring until you actually get injured.
At that point I knew that adding extra income streams was a must and found that most millionaires had rental property in their portfolio.
So I decided to become a real estate investor and didn’t have any idea about all of the different ways you could passively invest. I set out traveling down the active investing path.
This is someone that is involved with the acquisition process, securing financing, maintaining and selling property.
Types of investments:
- apartment buildings
- single family homes
- office buildings
- self storage
Usually investors in an active role are involved with a higher amount of risk as they have to personally guarantee the loan.
For active investors looking for a fast return on their investment property or a steady rental income check, they’ll either do a:
#1. Fix and flip
A fix and flip is just like it sounds. The active investor will fix or rehab a property and turn around sell it as quickly as possible for a profit.
The shorter the time frame, the better.
#2. Refurbish and rent
This is similar to the fix and flip except the investor plans on renting the property out for annual cash flow.
Besides the additional income stream, the property will typically appreciate in value thus making it a great investment strategy if they choose to sell in the future.
Commercial real estate (active)
Usually commercial active real estate investors put together a team to help them such as a property manager. However, all final decisions ultimately rest on the investor.
They have to manage the managers involved. As you can see, even with this type of approach, there’s still a considerable amount of work even with people working for them.
But the good news is that as an active investor, you’ll receive most if not all of any profit that the asset generates.Join the Passive Investors Circle Subscribe To My Youtube
What is Passive Real Estate Investing?
The skiing accident eventually led me down the path to real estate investing. Luckily I found out that there was more ways to invest instead of becoming an active investor.
During that time I attended a real estate investing conference for dentists (Freedom Founders) hosted by Dr. David Phelps.
This event proved to be the catalyst for me to taking a deep dive into passive real estate investing which eventually led me to start this blog teaching high-income earners about creating passive income.
Passive real estate investing is completely hands-off. It involves investing your capital into real estate assets without being responsible for any of the day-to-day management. Thus is involves much less risk vs an active investment.
Someone else is responsible for going out and finding these deals, getting the financing and dealing with the 3am calls when a water heater busts.
This type of investing is GREAT for the busy, high-income professional with limited time yet wants additional streams of income.
The time factor is one of the main reasons I chose the passive route via real estate syndications which is a partnership between multiple investors.
This group shares capital, skills and other resources which allows them to gain purchasing power and acquire properties they couldn’t otherwise afford.
The project’s sponsor or general partner is responsible for everything such as:
- finding property
- obtaining the financing
- daily management
- management of an entire portfolio of properties
- reporting back to the passive investors (limited partner)
Should You Be an Active or Passive Real Estate Investor? – 5 Factors To Consider
Now that you know the difference between being a passive and active real estate investor, here’s 5 factors to consider when trying to determine which one is the right approach.
If you’re the type of person that wants FULL control then active investing maybe the best choice.
From start to finish, you make all of the decisions from choosing property, rehabbing, managing tenants and/or sales.
On the other hand, if you’re more like me and are willing to putting your investment in the hands of others, then going the passive route may be best.
As an active investor, it’s no doubt that it take up a lot of time. Even if you’re not physically doing the work yourself, it’s on you to hire maintenance crews, contractors, property managers, etc. to make sure things get done.
You’re also going to be in the landlord position dealing with tenants (and their problems).
Passive investing doesn’t have to deal with any of this as it’s a hands-off form of investing. I deal with patients on a daily basis so the last thing I want to do is get calls from tenants at all hours of the night. No thanks.
Once you invest in passive deals, it’s the general partner’s responsibility to handle the property’s operations. Your job is only to make sure that the quarterly distribution hits your account on time :).
One of the questions new Passive Investors Circle members ask is, “Jeff, should I only invest in my area?”
As a passive investor, it’s MUCH easier to diversify across different markets. Why? Due to the fact that you’ll be investing with teams that have already taken the time to research those markets and put solid local teams in place.
Active investors need to understand the market and asset class they’re investing in. Some of their responsibilities include researching particular markets and putting together a “boots on the ground” team.
#4. Risk and liability
If you’re risk averse, then passive investing will be your best choice. If things go wrong as an active investor, you’re the one that’s held liable which could cause you to lose the property and your other assets.
As a passive investor, your liability is limited to the capital you invest. Usually the asset is held in an LLC and if anything goes wrong, the general partners are held liable.
Related article: Pros and Cons of Creating an LLC For Rental Property
Typically as an active investor, the financial returns are significant as you own 100% of the deal.
With passive investing, the profits are distributed among other investors.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
Which Is The Right Option For You?
When examining the active vs passive investing comparison, each option has positive aspects.
If you have a full-time job (like me) with limited time yet want to become a real estate investor, then the passive option would be best.
On the other hand, if you have access to deals with ample time and confidence of building a team then active investing may be right for you.
When trying to determine the right path to take, strongly consider your unique situation, goals, and interests.
One of the best things to do is research and find a mentor that can help guide you in the right direction.Join the Passive Investors Circle Subscribe To My Youtube