Passive or Active Investing, does it really matter in real estate?
Are you an Active or Passive Investor?
Who really cares, I just want to invest in real estate and make lots of money. I know this sounds funny but it is perhaps one of the most common phrases I hear from new investors to Real Estate. Knowing that 51% of real estate investors today are new to investing makes this topic a very important one.
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.
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 professional assist you and rely on 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 interacted with hundreds of Real Estate investors over the past 30 years and having been involved in gobs of investment acquisitions, I believe be the differences between Passive and Active Investing boils down to 3 main components: time commitments, risks & rewards, and Controls.
Pick which one is singularly most important to you before reading further. This may shed an aha moment for you because everything has its tradeoff.
All Real Estate investments take time commitments. 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
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. often a passive investor is limited on discretionary time and prefers to delegate these duties.
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
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 do not have to share with 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 responsibility to educate yourself on all the facets involved in your investments.
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 key. 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 and 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.