Passive vs. Active Real Estate Investing

A unique aspect of real estate investing is the multitude of different investment options and all of them don’t require you to purchase single-family and multi-family homes or take on an additional job as a landlord and property manager either. 

When someone hears “real estate investing”, the first scenario they often think of involves them purchasing a home to either flip it or rent it out. While both are viable options, there are plenty of other options that you can pursue passively, actively, or somewhere in between.

In general, there are mainly two categories most real estate investments fall under passive investing and active investing. However, there is a third option that offers the best of both worlds. We’ll call it “passively active”.

Active Real Estate Investing

Active real estate investing is when you’re actively involved in all aspects of developing and operating your real estate business. Whether it’s apartment complexes, AirBnbs, or any other type of property, you’re the go-to person for all decision-making.

An accurate way to describe how an active investor would operate in their real estate business is self-management. They either fulfill all roles required to manage the real estate business, including being the landlord, property manager, and forming a maintenance staff, or they can delegate certain roles to people they hire.

Flipping is the most common form of real estate investing but is often viewed as the most extremely active form. Most people instantly will think of flipping as buying a single-family home, renovating it, then selling it for a large profit. Especially thanks to the rise in single-family home prices. 

However, you can flip any type of real estate property, from single-family homes to multi-family homes to mobile homes to land. Regardless of the type of property, anything that’s been held with the intent to resale in less than 12 months is considered a flip. 

Wholesaling is another form of active real estate investing. However, unlike flipping, a real estate wholesaler doesn’t take possession of the real estate property and will carry very few costs.

As a wholesaler, you’ll contract a property from a seller, then actively search for any interested buyers. Once you have a buyer, you’ll then contract the property to them at a price that’s higher than the amount you originally contracted with the seller. Therefore, the difference is what you’ll keep as profit.

Pros vs Cons of Active Real Estate Investing

It’s easy to see what the drawbacks of active investing are. One of the more obvious ones is dealing with all of the headaches that come with tenants, toilets, and trouble. Even if you delegate roles to employees, you’re still actively involved in every part of operating your real estate business. 

On top of that, you’re also the one on the hook for all financial obligations and the liability of your real estate property. Therefore, I always advise making sure you have proper entity structure, liability insurance, and property insurance for your asset.

You’ll also need to set aside time to attend meetings, answer emails or calls, and do other activities, which creates an entirely new “job” for you in addition to your normal work schedule. This is certainly a big disadvantage to true “active” investing. 

On the upside though, you’ll have full autonomy as well as the ability to run the asset the way you like. If you’ve chosen the right asset, you’ll likely have the highest income possibility.

Another great advantage of active real estate investing is the tax benefits when you qualify for full-time real estate professional status. One of those tax advantages is the ability to write off active income with passive losses.

Passive Real Estate Investing

Passive real estate investing is having a more hands-off approach in your involvement with real estate investing activities. It’s a great option for busy physicians, especially since you don’t have to dedicate any time or energy after completing your due diligence on the property and the sponsor. Essentially, you won’t have any active responsibilities but will participate in the profits as a limited partner.  

Traditionally, the common form of passive investing is through a limited partnership in a real estate syndication. However, there are other ways you can invest passively such as mineral rights, certain debt and equity instruments, cryptocurrency mining machines, or single tenant net lease investments to name a few. 

We’ll discuss them in an upcoming post, but if you’re interested in learning about these opportunities sooner, feel free to reach out to me at any time.

Pros vs Cons of Passive Real Estate Investing

It’s easy to see the benefits of choosing a passive approach. Essentially, all the drawbacks that come with an active approach are virtually negated. 

Passive investors don’t have to deal with any headaches that come with being in an active investing role, including managing employees and handling tenant calls. Another great benefit of passive investing is liability is either nullified or substantially decreased. For instance, limited partnerships are exempted from any type of liability.

Although you don’t get the tax benefits that you would with a full-time real estate professional status, there are some decent tax breaks if your sponsor is fairly savvy.

One of the big drawbacks is you have very little control so you must take the time to read the OA’s carefully as it will detail the type of control you’ll have. Still, the returns are good. However, from a real estate standpoint, the returns are typically lower than if you were in an active investing role.

However, I will make mention that this isn’t necessarily the case when investing in mineral rights and debt and equity instruments where you can get very good returns passively.

The Best of Both Worlds

Earlier I mentioned there’s a third investing option available referred to as “passively active” investing. If you were to put active investing on one side of the spectrum and passive on the other, then passively active is the subtle sweet spot that fits in between.

With a passively active approach, you’ll put layers of insulation between you and the asset by creating a dependable team to complete daily tasks. This allows you to work “on” your asset and not necessarily “in” it. An example of this approach would be utilizing a property management company where you are managing the managers, not the tenants. 

Another example is creating strategic partnerships, such as general partnerships or joint ventures, where everyone brings different talents to the table. Then, the work of operating the asset is delegated among those partnerships. This will drastically decrease your workload and allow various skill sets to be strategically utilized to the benefit of the asset and its owners. 

In a passively active approach, you get to enjoy the best of both worlds. You’re able to take full advantage of the profits and tax benefits, like active investors do, without dealing with any of the headaches and troubles since you’ve insulated yourself with capable property management and an excellent team.

Choosing The Right One For You

Although real estate investing isn’t difficult to understand, especially when you compare it to the academic rigors we’ve been through, it still important to accumulate the right knowledge to ensure you can make smart decisions for your investing career. 

However, now that you have a good understanding of what it means to be active, passive, and passively active in real estate investing, you’re well on your way toward choosing the right type of real estate investment for you.

To aid in your decision process, start by establishing how much time and energy you want to put into investing activities. Next, establish the goals you want to achieve by investing in real estate.

Whether it’s to take advantage of the tax benefits or replace your physician income, once you identify these factors, it’ll make it easier to narrow down which type of real estate investment is the right fit for you.

Identifying the right investing approach will take you further down your real estate investment path toward achieving financial independence and winning your time back!

If you’re ready to start accelerating your investment path, I invite you to schedule a call with me. I look forward to sharing with you this “investable universe” I’ve discovered to help you prevent burnout and live life on your terms.

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