Our family has been in the real estate space since I was a child, investing and managing senior-care homes. I didn’t realize it at the time, but the freedom, travel, and time it afforded my mom to be a parent and pursue the things that matter to her were such a gift to our family.
When Michael and I got married, we became accidental landlords as we rented our previous homes when we moved to a new one.
As we built a small portfolio of rentals, we quickly realized that dealing with the hassles of being a landlord was far from passive.
Fortunately, we discovered that you can actually invest in real estate without the headaches or stress of becoming a landlord. We know, it almost sounds too good to be true, but you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.
Keep reading to find out more about what it means to passively invest in real estate and whether becoming an active or passive investor is right for you.
The Life Of An Active Real Estate Investor
Oftentimes, when most people think of real estate investing, they think of rental property investing. That’s the process of buying a single family home, finding a renter, and collecting monthly rent income. While it sounds easy enough, the reality can be quite more involved.
Even if you hire a professional property management team to help with the day-to-day operations, you as the landlord are still required to have an active role in the investment.
The property managers are there to take care of the daily issues, but you’ll still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unforeseen surprises happen, and sometimes having to put in additional funds to cover maintenance and unexpected repair costs.
The Life Of An A Passive Real Estate Investor
Passive investing, on the other hand, are “set it and forget it” type of real estate investments. You simply invest your money, and allow someone else to do all the heavy lifting on your behalf.
The beauty of passive real estate investing is that it’s totally passive. This means you don’t ever get any calls from the property manager, or have to screen any tenants, and you’re not responsible for filing any insurance paperwork.
Of course, being a passive investor does mean that you’ll have to relinquish some of your control in the investment. You’ll have to trust and rely on the sponsor team to manage the property and execute on the business plan for the investment project.
Active or Passive Real Estate Investing – Which One is the Best Fit for You?
Here are 10 factors to help you decide which type of real estate investing is right for you.
#1 – Landlord Life
If you’re ready to roll up your sleeves and get your hands dirty managing tenants, and making improvements, then an active investor role might be the perfect fit for you.
However, if the thought of handling the day-to-day tasks makes you nauseous, you should consider going the passive route.
#2 – Time Required
Active real estate investments require a significant amount of your time. You’ll need to be actively involved during the initial acquisition and throughout the project lifecycle.
Passive investments, however, only require your time up front, during the research phase.
#3 – Level of Involvement
If you love the idea of being hands-on and managing the property yourself, fielding tenant requests, and scheduling maintenance and repair appointments an active role might be for you.
Or would you rather sit back while someone else does all of that? If so, consider taking on a passive investor role instead.
#4 – Profit Distribution
As an active investor, you would likely be the only owner of the property, so you would get to keep any net profits for yourself. With passive investing, the profits are distributed among the many investors who contributed to the purchase of the investment property.
Keep in mind, this doesn’t necessarily mean that one type of investment will net you higher returns than the other. You’ll always need to do your due diligence and compare one deal to another.
#5 – Expense Responsibility
Active real estate investors are responsible for handling insurance claims, emergencies, and repairs, all of which may require additional money at times.
Passive investors only make their initial capital investment.
#6 – Risk and Liability
As an active investor, if the deal goes south, you’re personally held liable. That personal liability puts you at risk for not just losing the property, but also your other assets.
As a passive investor, your liability is limited to the capital you invest. Most times the asset is held in an LLC or LP. If anything goes wrong during the lifecycle of the deal, the sponsors are held liable, not the passive investors.
#7 – Paperwork Needed
Active investments are paperwork-heavy. You’ll complete paperwork from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.
With passive real estate investments, you typically only need to sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.
#8 – Your Team
As an active real estate investor, you’ll have the task of building your own team, including brokers, property managers, and contractors.
As a passive investor, you get the luxury of relying on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and most always already have a team set up to manage the property.
#9 – Opportunity for Diversification
With active investing, you’ll need to be an expert in the market and asset class you’re investing in. Investing outside your local area can be challenging because you need to research the market, find a team, and likely visit the area.
With passive investing, it’s much easier to diversify across different markets. Since you’re investing with teams that have already taken the time to research those markets and build strong local teams, you don’t have to start from scratch with each market.
#10 – Managing Taxes
As an active investor, you’re solely responsible for the bookkeeping. You’ll need to keep track of the income and expenses for the property. You’ll need to work closely with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you’re not required to do any bookkeeping. There’s no need to track income and expenses throughout the year. You’ll receive a Schedule K-1 every spring to show the income and losses for the property.
Deciding Which Path to Take
If you have the time available and you’re ready for an adventure, active investing just might be the perfect fit for you.
However, if your time is more limited but you have capital to invest, you might want to consider the passive investor route.
If you’re looking for a happy medium somewhere between the two, turnkey rentals and buy-and-holds may provide some control without the huge time investment required.
As you decide which is the right path for you, be sure to consider your unique situation and lifestyle, your personal goals, and your interests.