Should You Choose Active vs. Passive Investing?
Are you looking to begin investing in real estate but aren’t sure where to start? Many real estate investors find themselves in this common scenario of trying to figure out if active vs. passive investing is right for them. Depending on your priorities and finances, you may find one is better suited for your lifestyle than the other.
Let’s look at active vs. passive investing to determine their differences and benefits for real estate investors and wealth managers.
Active Real Estate Investing
As the name implies, active real estate investing is a hands-on investment strategy that requires an investment manager or active participant to manage and develop the real estate portfolio. They’ll know when to buy and sell assets and pivot into new real estate opportunities like small apartments, massive complexes, and multiple units.
Active real estate investors commonly purchase properties to make a quick return by either refurbishing and renting the property or fixing it up and flipping the property. It’s a popular strategy to utilize if an investor is seeking more control in negotiations, financing, and property selection.
The downside of investing actively in real estate is the time commitment and expertise required. To be successful, it’s critical to have a thorough understanding of the local market, and depending on the investment strategy, active investors will likely need a team of local professionals that may include attorneys, brokers, title agents, architects, property managers, and several different types of contractors. For the experienced investor, active investing can be rewarding if you have adequate time to dedicate to the investment. First-time investors often assume active investing can be done part-time or as a side hustle to their full-time job, only to find out that their new investment consumes their nights and weekends completely.
Passive Real Estate Investing
Unlike active real estate investing, passive real estate investing is a less involved day-to-day process. Investors can approach passive investing with a direct or indirect strategy.
Direct passive investing is when an investor purchases a property and hires a property management company to ensure tenants live a comfortable lifestyle. The property management company will be responsible for taking care of maintenance, collecting rent, and refurbishing and repairing buildings. In this strategy, the investor’s time commitment might be more limited to regular conference calls with the manager to help make decisions. However, you will still need a solid understanding of the local market as well as a local attorney, title company, broker, and other key professionals to work with.
Indirect passive investing is when an investor puts capital into a real estate syndication or partnership. The real estate syndication is managed by a sponsor who will combine his or her own capital with the capital of multiple investors. This provides the group with greater purchasing power to afford large commercial and residential properties.
The main advantage here is that the investor can receive all the same advantages of investing in real estate without any of the day-to-day responsibilities or time commitments. The right sponsor should have a greater level of expertise and experience in the local market and a team of professionals with a strong track record of successfully executing the chosen investment strategy. Additionally, pooling together capital from multiple investors will allow the partnership or syndication to collectively invest in larger, higher-quality investments or a greater number of investments than any individual investor could do on their own. This may help reduce the investor’s risk through diversification.
Which Should You Choose?
When deciding on whether active vs. passive investing in real estate is right for you, it’s essential to ask yourself which suits your lifestyle best. If you’re seeking more control over investments, want higher-risk, and have the time and skillsets to negotiate and develop properties, active investing may be right for you. On the other hand, if you’re seeking to make passive income, experience potentially lower risk, and spend less time focusing on managing a property, passive investing could be an ideal strategy to grow and maximize your wealth. However, it’s crucial to note; you can do both to diversify and scale your real estate portfolio.
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MRA Capital Partners offers real estate investment strategies focused on maximizing the internal rate of return through favorable deal structures and the pursuit of non-correlated investment returns. Learn more about our investment strategies by visiting us online. Also, sign up to join MRA Capital Partners’ preferred investor network to learn more about our upcoming unique investment opportunities.