Many people do not realize how dynamic real estate investing can be. Depending on your goals, you have to make a choice among many flavors.
- Area of focus: Commercial, Residential, Single Family, Multifamily
- Primary strategy: Buy and hold, fix and flip, development, value-add, stabilized assets, notes, etc.
- Primary Objective: Cash flow, appreciation, etc.Within each of these decisions are often-ignored factors that determine whether one is ultimately actively or passively investing. Whichever is right for you is up to you based upon your desires and needs.
Before we discuss which is right for you, let’s describe the two categories of investing.
Actively Investing: Just as the term alludes to, active investors are just that. Putting in work: Fronting the money, calling brokers, realtors, coordinating rehabs, on the site to manage improvements, working with banks and partners. In other words, actively investing is making your own investment opportunity or partnering in someone else’s with an active role.
The benefit of active investing is that the investor can create any opportunity that he or she identifies and can actively participate in the operations to control the success of the project or investment. The downside is…it’s work and time! My belief is that most people imagine the role of an active investor when they think of real estate investing.
Passive Investing: Passive investing is just the opposite of active. In true passive investing, the investor does not bring hustle or the deal to the table; instead, they bring their financial resources to an existing deal and enjoy the returns that the opportunity brings. Examples of passive investing include note investing, lending to other investors, or joining a multifamily syndication as a limited partner.
The pro of passive investing is that the investor does not have to get their nice shoes dirty and can enjoy a satisfactory return on their investment. The downside to this method of investing is that the investor has less (or no) control of the asset to ensure its success and must ultimately rely on the asset or the active partners to make sound decisions that lead to success of the investment.
Things to consider in determining whether you actively or passively invest.
Before you begin your journey into real estate investing, it is wise to consider what path you would like to take.
Time Commitment
To actively invest in real estate, you must put in the time. You either have to find time or make time, and the only correct choice is the one that suits your desires for your life. Of course within two extremes of time commitment is a spectrum:
- No Time: Perhaps you want to passively invest in someone else’s investment
- Some Time: Perhaps you want to build a small portfolio of properties that you actively manage or do only a few flips a year
- Whatever time is needed: If this is you, then path seems clear to invest actively.
Remember, there are different seasons of your life where you may have more or less time than the other. In my investing, I had to figure out how to make real estate work while being a husband and father to four children under the age of 6. Be honest with yourself about your time commitment.
Your career desires
As I talk about much on this blog, you can invest in real estate while doing what you love every day. Maybe you are a business professional, engineer, lawyer, doctor or pilot and you have a gift for your craft and field. You love it and hope to retire doing what you love. You honestly do not ever want to be a “real estate investor.” If this is the case, then you should really consider what I am going to share next.
Financial returns
As stated above, there is a small trade off that one will make when they decide to passively invest. In investing in a less risky manner, the potential for returns are also less. While you can make great returns as a passive investor, the active investor, the deal maker, takes on more risk and has the potential to make more. If you are a working professional, make great income, have a retirement plan and would like to diversify your portfolio, maybe the returns as a passive investor are more than enough to meet your financial objectives.If you are interested in leaving your current field of work, eventually working in real estate full-time, or to have massive wealth creation from real estate, actively investing may be your path.
Remember this.
In choosing today to invest actively or passively, you do not wear the title or have to live with that label. The great thing about real estate investing is that there are multiple paths to wealth creation for anyone! You can do both!
