Active Versus Passive Real Estate Investing –Which One Is Right For You?

Did you know that you could invest in real estate without the headaches of tenants, toilets, and termites? It is true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.

In this article, you will see what passive real estate investing means and find out if you should bean active or passive investor.

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buy a single family home find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.

We have a portfolio of single-family homes that we self-manage. The returns are good, but we are extremely active.

Even with a professional property management team on board, you as the landlord still have an active role in the investment.

The property managers may take care of the day-to-day issues, but you will still need to be

involved in strategic decisions, including whether to evict tenants who are not paying, filing

insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

What It Means To Be A Passive Investor

On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.

The great part about passive investing is that it is totally passive – you do not get any calls from the property manager, you do not have to screen any tenants, and you do not have to file any insurance paperwork.

However, being a passive investor also means that you relinquish some of your control in the

investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.

Should You Be an Active or Passive Real Estate Investor?

Here are 10 factors to help you decide which path is right for you.

#1 – Tenants, Termites, and Toilets

If you have dreamt of becoming a landlord, having tenants, and making improvements, then

consider an active investor role.

Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.

#2 – Time

Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.

#3 – Involvement

How hands-on do you want to be? Do you want to manage the property yourself, field tenant

requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?

#4 – Profits

With active investing, you would likely be the only owner of the property, so you would get to

keep any net profits. With passive investing, the profits are distributed among many investors.

This does not necessarily mean that one type of investment will net you higher returns than the other; you will need to compare one deal to another.

#5 – Expenses

Active real estate investors should plan to handle insurance claims, emergencies, and repairs,

which may require additional money at times, whereas passive investors only make an initial

capital investment.

#6 – Risk and Liability

With active investing if things go south, you are personally held liable, which means you may

lose not just the property but also your other assets.

With passive investing, your liability is limited to the capital you invest. Typically, the asset is

held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the

passive investors.

#7 – Paperwork

Active investments are paperwork-heavy, from the initial purchase of the property to tracking

purchase and rental agreements, bookkeeping, and legal documents throughout the project.

With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.

#8 – Team

As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.

As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The

sponsors are experts in the market and typically already have a team set up to manage the

property.

#9 – Diversification

With active investing, you yourself would need to be an expert in the market and asset class

you are investing in. If you are investing outside your local area, you would need to research the market find a “boots on the ground” team, and possibly visit the area.

With passive investing, it is easy to diversify across different markets, since you don’t have to

start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.

#10 – Taxes

As an active investor, you will be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You will also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.

As a passive real estate investor, you do not need to do any bookkeeping. You receive a

Schedule K-1 every spring for your taxes, which shows the income and losses for that property.

No need to track income and expenses throughout the year.

Conclusion

If you are ready to roll up your sleeves and get involved in the various aspects of being a

landlord, active investing just might be the perfect adventure for you.

However, if your time is limited but you have capital to invest, you might want to consider being a passive investor.

If you are hoping for a middle ground option, turnkey rentals and buy-and-holds may provide

some control without the huge time investment.

When determining which is the right path for you, be sure to factor in your unique situation,

goals, and interests.