Which Path to Take – Active or Passive Investing?
In our previous blogs, we have been discussing different ways and strategies to invest in real estate. But we have not been talking about the general investing world. Hence today, we will discuss which path to take — active vs passive investing?
For investors who are investing for quite some time, these terms pretty familiar to them. Though there are various ways of investment strategies, they can be generally categorized into two types: active or passive investing. This article will give you details on how these two types of investment strategies differ based on tools, management approach, and investor attitude.
Active and Passive Investing Defined
What is Active Investing?
From the word itself, active investing is where real estate investors actively manage their investments. It’s where investors buy the property on his own, then fix and sell it to generate cash flow. Because of this, investors who choose to actively invest in real estate need to be hands-on. Active investors are required to involve himself in every step of the deal. From finding a property, getting financing, applying for a loan, fixing the property if needed, and managing it.
Examples of Active Investing
- Flipping Houses
- Short-term rentals (Airbnb, VRBO, etc.)
- Note investing
- Buy and Hold Real Estate
- Buying properties in Auction
- Wholesaling
What is Passive Investing?
On the other hand, passive investing is an investment strategy that requires minimal involvement. It is more of a hands-off approach. Passive investing allows investors to put their capital into a real estate deal and have sponsors execute business plans and run day-to-day operations. This strategy is also known as real estate syndication. It can be applied to apartments, mobile home parks, self-storage, and even senior housing. When an investor passively invests, it is like he/she is outsourcing the selection, management, and/or maintenance of the investment property to a sponsor. These sponsors will then collect capital from other investors to purchase a large or whole investment portfolio. After that, sponsors will take care of everything and will report back to the investors.
Examples of Passive Investing
- Real Estate Syndication
- Real Estate Investment Trusts
- Private Money Lending
Active or Passive Investing: Table of Comparison
Here is a comparison table that easily summarizes both strategies:
| Feature | Active Investing | Passive Investing |
| Management Approach | Active management or hands-on approach | Passive Management or hands-off approach |
| Involvement | Hands-on | Minimal |
| Investor Role | Choosing/finding the property, getting a loan, management, and maintenance | Finance the investment property |
Active or Passive Investing: When to Use Them?
To help you better decide which path to take – active or passive investing, here is a checklist of when to use active or passive investing.
Invest actively if you:
- Want to be hands-on to your investment
- Love the idea of being a landlord
- Want to learn the ropes
- Like self-managing
Meanwhile, you should invest passively if you:
- Prefer a hands-off approach
- Want to outsource property management
- Not into self-managing
- Do not have time to manage the investment
Active vs Passive Investing: Pros and Cons
Active Investing
Pros
- Control – Active investors have more control over their investment since active investing is more on a self-managing approach. Investors can decide what to do with their investment, how they would want to run it, or if they want to sell it.
- Training – You can learn every trick of the business.
- Higher Potential Return – Since the investment is fully-owned by the investor, it means he/she will also get the whole profit. Active investing can produce higher upside potential since the profit does not need to be a divide among numbers of investors.
Cons
- Time-consuming – Investing actively can eat a lot of your time because you will need to do everything by yourself. The workload from starting, finding, and managing an investment is no joke. It requires a higher time commitment.
- Missed opportunities – Being an expert in a particular market requires experience and does not happen overnight. When investing actively, investors may miss out other investment opportunities because he/she is already pre-occupied with the active investment.
- Not diversified – You may be focused on one investment strategy, market and/or asset type.
Passive Investing
Pros
- Time-saving – Like mentioned above, passive investing requires minimal involvement in the investment. The work does not need to be done all by him/her. The investor just needs to put capital on a deal and let the sponsors do the job.
- Less risky – Most syndication is run by sponsors who are experts and have extensive experience in the market. This means that investing passively is like putting your money on a proven investment system. In addition, you will know the project’s limited partner returns beforehand. Hence, you have an assurance of the returns.
- More opportunities – Passive investors can still explore other investment opportunities since they do not need to closely look after their investments. They can let the sponsors generate income for them while looking for other investment types and diversify their portfolio.
Cons
- No control – Passive investors do not have the complete charge of the investment. The sponsors make the decision for the deal. They decide how to run it, what to do with it, whether it is for rental and others.
- Cannot get their money out anytime – Deals are carefully studied and analyzed. Once you join a deal, the sponsor will give you a projected return. This means you cannot get your money out if you want to. Once you signed up for the deal, you have to go with the deal flow.
Which is Better – Active vs Passive Investing
Both investment strategies have their strength and weaknesses. No one can tell you which strategy is better especially if it was based on personal reasons. At the end of the day, it will all boil down to YOU. You will be the one to determine which will work the best for you based on your personal preferences, financial goals, risk-tolerance, and management approach. Make sure to educate yourself and do your homework for smarter financial decisions.
Personally, I recommend both active and passive investing for diversification.