As I’ve shared in my series for Beginner Investors, there are so many ways to make money in real estate investing.
The key is to figure out what is going to work best with you and your specific lifestyle and criteria.
This week, I’m going to break down the difference between Active and Passive investing.
The first question you should ask is ‘are you more of an active or a passive investor’?
By determining where you fit along the spectrum, you can really determine a strategy that works best with your lifestyle so that you can have the most success in your real estate investing ventures.
With Passive Investing, you are much less hands-on when it comes to your investment.
It can be great because it can mean that you don't have to invest close to where you live. You can have a portfolio completely diversified based on locations, which is a great advantage.
You also don't have to worry about management, getting calls from tenants, broken toilets, floods, the whole thing.
You've heard it before, I'm sure, many tenant nightmares, and you don't have to deal with any of that as a passive investor, which is amazing.
You can also participate in real estate transactions that are a lot larger than things that you would be able to do traditionally yourself. You could invest in a large commercial property or a large apartment complex without having to have the millions of dollars in order to get into those sort of deals.
Ways of Passive Investing can include: investing in syndications, investing in private money funds, investing with a private investor, and/or you partnered with the investor.
You're putting up the money, they're putting up the work.
The other option is investing in real estate yourself, but setting up a system that allows you to become passive from the system. You're buying a piece of real estate, but you are building a team of real estate professionals all around you that are going to handle everything to do with that investment.
All you have to do is collect the checks.
As with all investing strategies, I want you to be aware of some of the cons of passive investing.
People get into real estate investing because the returns are great, and in my opinion, better than any other investment vehicle.
But as a passive investor, you are going to be sacrificing some of those higher returns in order to become so passive.
For example, if you buy a piece of property yourself and you want to be completely passive and hands-off with it, you're going to have to hire other professionals to handle everything to do with the investment.
So you're hiring your property manager, cleaners, repairman, contractors, etc. to do the work for you so you don't have to do it. But, those people are going to cost money, and those people are going to eat into your profits.
This is something to consider. What is more important to you, returns or your time/energy?
Even when you are investing passively, you still have to be aware of certain aspects of your investment. You still do have to do research, especially more so upfront to figure out all the pieces.
Making these decisions can often be the hardest part. Figuring out which companies, which syndications, which investors, which deals you should be investing your money in and who you need to trust, are all important decisions to make.
One of the best advantages of real estate investing is the fact that you can have so much control over the asset, unlike a lot of other investment vehicles.
If you're investing in the stock market, you don't have control over the company that you're buying stock from.
Whereas in real estate, you really can control the asset.
You can do all of the research on finding the property. You can negotiate the deal, build money in when you buy the deal. You can improve the value of the property through renovations. You can screen for the tenant. You can manage the property. All of these things.
That's what most active investors are really drawn to. They really like the idea of being able to control every aspect of their investment and they like to have their hands in all of these processes.
Some active investors and some real estate investors want to take this whole investing thing a step further and have real estate investing become their full-time job. They would fall under the active category as well.
There are lots of ways to get involved with Active Investing.
It could involve becoming a professional fix and flipper or a wholesaler. Maybe somebody wants to start their own syndication or their own private money-lending pool.
They could start a private investment firm where they're raising private money and then putting that money into investments that they then control & manage so they can acquire more properties for their investors.
If these sorts of roles are more appealing to you, then you would fit into the active category.
When you're figuring out where you fit into all of this as an active investor, it’s important to consider what your time is worth as well.
You really should be compensated for your time, and active investing will require a lot of your time.
If you were to buy a piece of property, you have your hands in all aspects of the deal and managing the property. You will still want you to factor in the management costs or the other costs of what you're doing into your spreadsheet or when crunching your numbers.
This way, if you wanted to take a step back in the future, those numbers are already factored into the property costs. At the end of the day, you are putting your time into something, and you should be compensated for that.
It's also rare to see somebody that's skilled at absolutely everything. I find that even the most successful active investors will have a really strong team of professionals around them to help fill in the gaps.
This is a cost to be considered and factored into your decision.
The key to all of this is to consider how much time, skills, energy, and/or money you want to put into your Real Estate Investing.
Consider what kind of lifestyle you have, and what's kind of lifestyle you want and this will help in figuring out whether or not you are an active or a passive investor.
If this is your first real estate deal, it could be a good idea to start out with something more passive.
Learning from a strong team of people with experience can help you through the process.
Or perhaps you want to jump in feet first and just figure everything out as you go (which is kind of what I did when I first started out).
That can be great too because you can learn a lot and make a lot of money right from the beginning.
There's no right or wrong answer with this. I think the most important thing to do is to do your research, figure out what resonates the most with you so you can get that first property or that first deal under your belt. It doesn't mean that you have to stick into one category forever.
As you get more comfortable and more experience with real estate investing, then more opportunities will open up for you.
You could end up moving from passive to active or active to passive, whatever it is that you want to do at the time.