The Active VS Passive Real Estate Investment Breakdown

What is the best way to invest in real estate? While an investor can utilize numerous strategies and approaches to pursue financial freedom, it starts with one debate: active versus passive investing.

So what’s the difference? What are the pros and cons? How do you know which approach is right for you and your finances? Well, you’re in the right place – we’re going to break down the debate so you can make a more informed decision!

Let’s start by defining our terms.

What is active real estate investment?

Active real estate investing involves direct and hands-on participation in the entire investment process. This means the investor is personally acquiring, managing, and potentially selling the property. Active investors often take on the role of landlord if investing in residential property.

What is passive real estate investment?

Passive real estate investing refers to a more hands-off approach where the investor contributes capital but is not involved in the day-to-day management or decision-making of the properties. Instead, passive investors rely on third parties, such as fund managers, turnkey partners, or investment platforms. The approaches and financial details vary greatly.

The Active Real Estate Investing Breakdown

The Pros

Control and Flexibility – You have complete control over property management decisions, including resident selection, rent prices, renovations, and exit strategies. Every decision is up to you, and you will always know what’s going on!

Higher Potential Returns – Active investors don’t have to split their income with property management fees or other ongoing costs apart from repairs, maintenance, and renovations. This can increase profit margins when done well.

Hands-On Experience – Active investing lets investors learn the real estate market intimately. Because you’re on your own, you’re forced to learn quickly. That hands-on experience is precious in this business!

The Cons

Time-Consuming – Active investing requires significant time and effort, from property acquisition to ongoing management and maintenance. It can quickly become a full-time job.

Risk and Stress – Active investors bear the burden of market risks, renter issues, and property management challenges. This burden is greater when you’re just beginning and lack the experience to avoid newbie mistakes. At the end of the day, you will only have yourself to blame.

Limited Diversification – Active investors usually fly solo. Individuals are limited in how much they can handle and where they can be. Active investors are typically restricted to their local markets and a handful of properties, limiting their potential to spread risk and compound cash flow.

Market Knowledge Required – Successful active investing demands a strong understanding of the local real estate market, property management, and legal details of the business. There’s a lot to learn, and ignorance and misunderstandings can cost big money.

Passive Real Estate Investing

The Pros

Minimal Time Commitment – Passive investing comes in various strategies, but they all share this: it won’t become a full-time job. While passive investors must engage with their portfolios and oversee their investments in some capacity, they aren’t required to get in the trenches.

Diversification –  Passive investors can diversify their portfolios more than active ones. This is because you leverage the capacity and reach of a property management team. Where one person would likely max out at a few properties, someone using professional management is virtually unlimited in the number of markets and properties to invest in.

Lower Risk –  By spreading investments across different assets or markets, passive investors can reduce the risk associated with any one property.

Leveraged Expertise – Passive investing helps inexperienced people avoid costly errors. Because you’re leveraging the experience of property managers, turnkey partners, and other industry professionals, you don’t have to make mistakes to learn what not to do. Those lessons have been learned for you.

Further Reading: What Property Managers Do (And Don’t Do) for Investors

The Cons

Limited Control – Passive investors have little to no control over the day-to-day management of the properties, relying on the decisions of fund managers or partners. Now, this does vary by passive strategy. A turnkey SFR investor has far more control than a crowdfunding or REIT investor.

Lower Potential Returns – Again, this depends on your flavor of passive investing. Crowdfunding splits returns between investors. Some require fees to fund managers. Additionally, lower capital investment (as in crowdfunding) diminishes potential returns.

Fees – With turnkey investing, you’ll have some property management fees to contend with. We’d argue that these fees are worth your while because they empower investors to more effectively diversify their portfolios while also growing and preserving property values.

In Summary…

Look: there’s no one answer for everyone. Your strategy of choice comes down to what you want and need from your investments. Active investing is ideal for those who want control, have the time and expertise to manage properties, and are willing to take on more risk for potentially higher returns. Passive investing suits those looking for a more hands-off approach that diversifies their investments and mitigates risks.

Want to know if turnkey real estate investing is right for you? Your REI Nation advisor is waiting!