Real estate investing is a great way to make money. Not only can you make a profit from rental income, but you also have the opportunity to build long-term wealth through appreciation.
As you get started in the world of real estate investing, your main decision will be choosing between active or passive real estate investments. If you’re looking to maximize profits, an active investment approach may work best for you. If your priority is to achieve time freedom while having your money work for you AND building longer-term wealth, consider passive real estate investments.
Active Real Estate Investing
Active real estate investing can be done under many different strategies, from house flipping to commercial real estate buy-and-hold. But always exchanging your time for profits. For example, you may purchase a home at below market value and fix it up before putting it back on the market. The goal of this type of investment is to turn a quick profit by finding bargains, fixing them up and quickly selling them again.
If you choose to take an active approach to real estate investing, you will have to spend a lot of time working on your properties. This means finding good deals, rehabbing the properties, performing asset management and of course managing the disposition of the assets.
Passive Real Estate Investing
Passive real estate investing is the hands-off approach to real estate investing. It’s often referred to as “paper” investing because it doesn’t involve any direct property management. Instead, investors work with a real estate syndication company who sources and manages deals for them.
While this may seem too good to be true, passive real estate investing can actually provide a higher return on investment than active investing — if you know where to look.
The benefits of passive real estate investing include:
- No property management headaches
- Simplified tax advantages
- A great way to diversify your portfolio
- Increased access to high-quality deals
Active Versus Passive Real Estate Investing
Both approaches can be profitable, but they are very different. The active approach requires that you spend a lot of time managing your investments, but it also offers more control over the properties. The passive approach takes less time, but it requires more trust in your partners because they’ll be handling the management.
Passive investing is the path of least resistance. With passive real estate investing, you partner with real estate pros that manage the investment from top to bottom.
Here are 4 factors to help you decide which path is right for you:
Do you have the time? Real estate investing takes time. You must research, evaluate and find properties that meet your criteria for investment success. You’ll also need to monitor your investments and make adjustments as needed. When making repairs, do you want to oversee the work or trust someone else? If you’re not willing or able to take on these tasks yourself, passive investing is a better choice for you.
How much money do you have? Active investors must put up a substantial amount of money for repairs and renovations before they can rent out their rental property or find a buyer for their investment property. In contrast, as a passive investor, you gain access to a more diversified pool of investments with as low as $25k.
How much of a “control freak” are you? The real estate market is cyclical, so periods of strong sales and profits are often followed by drops in demand and prices. That’s why it’s important to understand how much risk you can stomach. If you’re a passive investor, you don’t have a lot of say in how properties are managed, which means you will be trusting the sponsor team to handle all operational decisions from acquisition, to management, to disposition of assets.
Are you short on funds? If you don’t have a lot of cash to invest, being a passive real estate investor may be for you. You will likely need to make a lower initial investment than you would if investing directly in a property. However, if you have some savings and are willing to take on higher risk while at the same time spending a lot of time to source deals, perform property management duties, oversee renovations, implement tax efficiency strategies and oversee dispositions, becoming an active investor may be more lucrative.
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