Active Vs. Passive Real Estate Investing: Choosing the Right Strategy

02.12.21 11:12 AM By Michael Euperio

        Earning a sustainable income, generating tax shelter, and building wealth over time are just some of the reasons why investors choose real estate. 


These are certainly fantastic benefits that can be achieved by investing in real estate but what is the best way to go about it? Should you take an active role and direct control of property management, deal with tenants, and provide the vision for a renovation project? Or are you pursuing mailbox money and inclined to keep your hands free of tenants, toilets, and rent collections? 


Real estate investment strategies fall into two main categories - active and passive investing. 


Now, let’s examine these a bit more closely:

ACTIVE REAL ESTATE INVESTING 

        Active real estate investing is exactly what that sounds like - an active approach to generating income through real estate activity. 

 

It requires your direct involvement in the investment process either entirely or in the major parts of the process such as the acquisition and renovation of the property. 

 

In the multifamily setting, investing actively is a tremendous amount of work. An active real estate investor can buy a stabilized asset for longer-term cash flow (buy and hold) or reposition an asset through renovation and optimizing management (value-add strategy). You have full control of the business plan and decide how to operate a property 

PASSIVE REAL ESTATE INVESTING 

        In passive investing, an investor can invest through a multifamily investment firm or a sponsor who has the expertise in the acquisition and management of multifamily properties. 


With this strategy, an individual investor (YOU) is considered a limited partner, while the firm or sponsor takes the role of the general partner. Your responsibility is bringing in the capital while the general partner is tasked to look for the deals and manage them.

How will investors know which investment best suits them?

Here are the top 5 key questions that must be considered before investing

1. How much control do you want to have?

        Being a passive investor, you DO NOT have any control of the operations and management of the property. You are entrusting your investment to the sponsor or the firm. 

If you are not comfortable with this arrangement, active real estate investment might be a better path for you.

As an active investor, you decide when to buy and when to exit, you determine renovation and Capex budget, or whether to add certain amenities to improve the overall community. With this, you have a clear watch for your own investment.

2. How much time do you want to spend?

        Active investing, as the term indicates, requires your "active" participation in the whole investment and management process, which then means greater time commitment on your part. 

You also have to allow some time to gain industry knowledge and become really familiar with your market. Finding deals is just the beginning and, if you don’t have broker or owner relationships to source opportunities, it will take some time to build those.

If time is a major hurdle, you may consider opting for a passive type of investment. The passive investment allows you to "outsource" the major tasks to a firm or a sponsor. Your role is vetting the apartment syndicator and the deal. 

3. What kind of skills and personality do you have?

        While you may like to be accountable for your real estate investment, you might consider the experiences you have about investing. Deciding to go active needs you to lead active real estate activities you might not know about.

Are you confident with your negotiation skills? Can you or are you able to manage a professional property manager or management company? Do you have a desire to communicate with outside investors and provide regular updates on performance?

Be sure to know what you are getting yourself into. 

4. How much are you willing to risk?

        In a passive investment, you can lean on others’ experience and expertise to weather any storms around operational issues or economic downturns. Typically, limited partners have a preference in a syndication relationship as well so investors can have confidence they can minimally gain a modest return before the sponsor participates in cash flow or profits.

With an active investment, you have full ownership of the business plan so there is some flexibility to adjust how you operate an asset around rents, capital expenditures, or cash management to increase income or build up cash reserves. Control can potentially help garner greater upside but also could introduce more risk depending on experience or conducting activities misaligned with where we’re at in the real estate cycle.

5. What is your main goal? 

        If you’re wanting to stay relatively hands-off when it comes to your real estate investments but still want to reap the asset class’ benefits, then passive investing is probably your ideal route.


When it comes to returns, an active real estate investor might stand to receive higher profits or cash flow by having more control over the business plan. However, not every investor needs or wants to pursue real estate full-time. You may be perfectly happy with your current means of generating your primary income or love your career. And, that’s ok!


        Ultimately, choosing whether to pursue real estate investing actively or passively will require careful consideration. The key is to get into the game regardless of your investment strategy so you can take advantage of the many benefits of multifamily investing. 

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