My family has invested in single family homes in Colombia for many years, and I was taught that buying small rental properties and being a landlord was the most secure way to preserve and build wealth.
So, I invested in one rental property after another in my quest for financial independence, but the more properties I had, the more time they required from me to deal with the hassles of being a landlord.
That’s when I discovered that you can actually invest in real estate with a team, allowing you to grow your portfolio bigger, faster, and without the headaches of tenants, toilets, and termites. This was shocking to me at first – that you can get all the benefits of investing in real estate, without any of the hassles of being a landlord!
In this article, you’ll see what passive real estate investing means and discover whether you should be an active or passive investor.
What It Means To Be An Active Investor
When most people think of real estate investing, they think of small rental properties – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different, especially when you’re trying to scale.
Even with a professional property management team on board, you as the landlord still have a very active role in each investment property for the duration of ownership.
The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
Active investing in real estate requires your invested capital, multiple hours of your time each week, and ongoing attention to detail, which can be tough to balance against your vibrant family life.
What It Means To Be A Passive Investor
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
Should You Be an Active or Passive Real Estate Investor?
Here are 10 factors to help you decide which path is right for you.
#1 – Tenants, Termites, Toilets and Calls at 3AM
If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then you might be excellent at the active investor role.
Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.
#2 – Time
Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.
#3 – Involvement
How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?
#4 – Profits
With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
#5 – Expenses
Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make an initial capital investment.
#6 – Risk and Liability
With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.
#7 – Paperwork
Active investments are paperwork-heavy, 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, on the other hand, you typically 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 – Team
As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.
As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.
#9 – Diversification
With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.
With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.
#10 – Taxes
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your accountant to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor in US commercial real estate syndications, bookkeeping is not your responsibility. You receive a Schedule K-1 every spring for your US federal taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year.
If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you.
Alternatively, if your time is limited but you have capital you want invested in a stable economy, you might consider being a passive investor in commercial real estate syndications across the US.
If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.
When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests. If you want to learn more about my personal experience in moving from single family rentals in Colombia to large, commercial syndications in the US, I’d love to get further connected. Start by joining the Fincapital Investor Club and we’ll soon be on a call swapping stories and planning our next deal together.