Actively or Passively, What is the best way for you to invest?
Most real estate investors can be separated into two categories, passive investors and active investors. If you’re trying to determine the differences and which one is the best fit for you and your personal situation, hopefully, this will help!
ACTIVE REAL ESTATE INVESTING
Active investing is when an investor personally purchases a property for rental cash flow or to fix and sell for a profit. The property could be anything from a single-family home to a large multifamily property. Active investors are involved in every aspect of the deal from finding it, obtaining financing, personally guaranteeing the loan and subsequently managing the investment.
PRO’S
CONTROL
For some people, handling all the nitty gritty details of the investment process is imperative. They want to be able to decide when to sell, what rental rates should be, and what to improve on the property. Some want the ability to do some of that work by themselves so they can cut costs.
PROFIT
Because this person doesn’t share any of the responsibilities they don’t have to share any of the profits. This doesn’t mean they will be more profitable, only that they’ll keep a larger share of whatever profits are made.
CON’S
RISK
Anytime someone is keeping all the profits they are also assuming all the risk. This means if something goes south, the solo active investor would absorb all the losses that occur.
LEVERAGE
If the individual is the only capital source, whether that be cash or financing, they are likely limited on how many properties they can purchase. Instead of diversifying and spreading the risk across multiple investments, they put all the risk into 1 or 2 properties.
TIME
This is the return that most people don’t factor in. Real estate investing isn’t a set it up and leave it type on investment, it’s an enormous responsibility. They would need to handle everything during the purchase process such as the due diligence and loan process as well as everything during the hold period like maintenance, tenant placement and legal compliance. You can outsource some of that to property management companies but you’re still the main decision-maker at the end of the day.
