Are you an Active or Passive Investor?
Did you know that roughly 51% of real estate investors today are new to investing? If you are one of the people newer to investing, I have simple questions for you. Do you plan on being an active investor or a passive investor? If you can quickly and confidently answer this congratulation, you are well positioned to find investments that you will be passionate about.
If you raised your eyebrow wandering what I am even talking about this article is intended for you. I write it today because most people I talk to do not seem to know the difference.
Let’s face it, to be truly successful in anything you want to have passion in what you do. Investing for the sole purpose of making lots of money will rarely get the job done. The real money comes from following your passions and helping people (such as providing quality housing for your tenants).
So what type of real estate investing do you want to do? What type of investor are you. Putting yourself in the correct investor class will allow you to focus on the right investments and bring you much more quickly to accomplishing your goals.,
Identifying the differences
Are you a hands-on, roll up the sleeves, let’s get dirty and get the job done, type of person? Or do you prefer to sit on the beach sipping Pina Colada’s while someone else, such as a property manager takes care of the details and sends you checks every month.
As the name implies you are taking on a role where you are actively involved in the day to day operations of your investment. Active investing requires a great deal of confidence, mechanical and or structural knowledge and a great resource of tradesman in your database to assist with the bigger tasks and those task that may involve special license .
Again, the name implies you are taking a more passive approach. You want the comfort of knowing you have investments secured by real estate and you are investing in a vehicle that has created more millionaires than any other investment class available. However, you are a person who prefers to leverage off the abilities of proven systems. You prefer to let the professionals use their resources of economies of scale to accelerate your ROI. You desire to use their expertise to keep your investment returning sustainable returns while you enjoy life.
Identifying which investment style is best for you requires you to understand all the true differences between the two. Having been involved in thousands of investment acquisitions, I see the differences between Passive and Active Investing boils down to 3 main components: time commitments, risks & rewards, and Controls.
There is no right or wrong (even though many people will try to pursued you into believing one is better than the other), this is just their opinions, it is their investment style and may not be yours.
Pick which investment style is singularly most important to you. This may shed an aha moment for you because everything has its tradeoff.
All Real Estate investments take time commitments. The active investor commits more time for an anticipated tradeoff of higher ROI
As an Active investor; you commit much of your time to the daily decisions and activities required to operate the investment in hopes of squeezing out more profits by doing things yourselves. Often you have more discretionary time on your hands and this role is like a job or at least part time job for you. If you do not have discretionary time to commit then active investing will be ineffective for you
As a Passive investor; you choose to delegate these roles to more experienced professionals who can utilize their knowledge and resources and economies of scale pricing to maintain a fair profit for you. passive investor tend to be limited on discretionary time and prefers to delegate these duties.
Investors always want to control the outcome. The more time you have to commit and the more skills you have the more controls you can retain for yourself.
As an Active investor; your number one objective is often to maintain all the control and decision making processes. You feel you are better suited to make your money grow than some hired person. You want to build your own team of professional tradesmen. If you have a great network of resources active investing can be very lucrative
As a passive investor; you do not want to be bothered by the day to day decision making of an investment. You feel that hired professionals are better suited to make decisions because they do this for a living day in and day out. You believe professionals have their own power teams already built and they can provide more efficiency to the operations. You prefer to give your controls to hired professionals to manage and let them do what they do as you have a place reserved for you at the beach and it has been awhile since you stopped to play..
Risk and Reward
As an active investor; you get all the profits and have less expenses toward tradesmen and project managers. This is what is so compelling to be an active investor. The flip side is you also get all the risks, no one to share this either.
As an active investor you chose to be involved in the day to day decision making process, you get to call all the shots and watch your investment evolve. You must be very calculated and knowledgeable when making decisions. You take on the risk and responsibility to educate yourself on all the facets involved in your investments in trade for higher rewards.
If you buy a fix and flip for example, you want to have basic understanding of how a house functionally operates. You want to have a clear understanding of cost to replace everything from roofs to A.C to bath fixtures, etc. You want to find and build your own team, from tradesmen to do things that require license such as electrical work and plumbing to landscapers, realtors and attorneys. Active investing is often better suited for people who have owned multiple properties and understands property and transactions of the property. Any mis calculations when estimating cost or repairs as an example can take a profitable venture and turn it negative fairly quickly so experience is paramount. As an active investor gets good at his or her role they can start to automate some of these processes and make things operate more efficiently.
As a passive investor, you have far less risk exposure. You believe it is best to plug into a duplicable proven system. You believe companies or professionals who have proven track records of success, who have already built up teams to do the variety of day to day task provides for economies of scale pricing that can benefit you. You also benefit from reducing your risk. When you hire professionals you are transferring your risk to them and this may prove to be a more profitable venture if you are not real savvy about home repairs, cost of renovations or management of property.
We see new investors dive into investing without ever giving these factors any considerations. With the advent of HGTV and the entire do it yourself t.v fix and flip programs everyone seems to want in. Watching an entire home renovation condensed to 30 to 6o minute programs (less about 20% of time for commercials) does not give you the clarity you need to understand these nuances.
Once you decide whether you are an active or passive investor I invite you to think of your investment plan. I always say begin as you plan to proceed. Hopefully this investment plan and understanding of investment style will accelerate your passion and levels of success.