One of the conversations I’m consistently having week over week with first time investors is the conversation of whether to passively invest, or actively invest.
What’s the difference?
Well, as a passive investor, you’re typically investing anywhere between $25,000 - $50,000 (or MORE!) in someone else’s deal - typically as a limited partner.
While, as an active investor, you’re purchasing the property yourself - which means coming up with the capital, managing the asset, and taking on all the risk.
Let's dive into some of the pros and cons of each, so that YOU can better determine which makes the most sense for yourself.
First, passive investing!
The biggest benefit in passive investing is that it’s exactly that, it’s PASSIVE! Meaning you’re not doing ANY of the work. You hand over a check, and then you receive your quarterly distributions (or whatever the general partner determines for a payout schedule).
For someone that doesn’t have the time to actively invest in real estate, or isn’t comfortable with their skill set as an active investor - then this could be a great route to go!
However, there are some cons associated with passively investing in other people’s offerings. Some of the drawbacks are lack of control, the inability to use leverage to grow, and the inability to scale quickly.
If you’re someone that likes control, and you want to be in charge of your real estate investments - then passivel investing won’t be a great fit. As a limited partner in a deal, your control is exactly that, limited! Meaning, there’s no ability for a limited partner to determine rents, refinance schedules, sale timelines, etc. - but maybe this is a positive if you don’t want to be involved in those decisions? That’s up for YOU to decide!
Now, active investing!
Some of the benefits of actively investing in real estate are the opposite of the cons associated with passive investing.
As an active investor you’ll have complete control of your asset. Meaning, YOU control the asking price for rents, the property management, the renovations, the refinance schedule, and the sale timeline. All of these factors typically lend to the ability to scale MUCH FASTER than passively investing. As an example, Emily and I reached financial freedom in just two short years after starting down the path of actively investing in real estate.
The benefits of active investing do come at a cost, though. Specifically, risk and time. As an active investor you’re taking on ALL the risk! Your name is the name signing on to the loan, so if things go south, that’s YOUR ass on the line. That, and it’s also a hell of a lot of work, effort, and time. Are you willing to take on the risk and make the time investment to actively invest in real estate? That’s up to you to decide!
I hope this article shed some light on just a couple of the pros and cons associated with passively and actively investing in real estate.
As always, any time you want to chat about real estate investing - I’m your guy!
Posted by Paul Begich on