Whether you get started in real estate accidentally like one of us (Willie) or you kick off your real estate investing journey on purpose by purchasing a few rental homes like the other of us (Kevin), it’s easy to assume that becoming a landlord is the only way to go about becoming a successful real estate investor.
That explains why most people invest in one rental property after another in their quest for financial independence. Unfortunately, this also explains why investors run out of steam, because the more properties you own, the more time you have to commit to dealing with the hassles of being a landlord.
It took both of us about 13 years of trial and error to discover that you can actually invest in real estate without the headaches of tenants, toilets, and trash. It’s not too good to be true!
You can enjoy all the benefits of investing in real estate, without any of the hassles of being a landlord.
In this article, you’ll see what passive real estate investing means and find out whether you should be an active or passive investor.
What Does Being An Active Investor Entail?
When most people consider what it means to be a real estate investor, residential rental property management comes to mind. The general public will quickly assume that to become an investor you’d buy a single family home, find a tenant, and collect monthly rental income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an extremely active role in the investment. Landlords still shoulder when to schedule and how much to spend on maintenance and repairs and other large financial and strategic decisions regarding the property.
The property managers may take care of the day-to-day issues, but you will still need to decide whether to evict tenants for non-payment, file insurance claims when unexpected surprises happen, and sometimes contribute extra funds to cover maintenance and repair costs.
What Does Being A Passive Investor Entail?
Alternatively, passive investments are the “set it and forget it” type of real estate investments. You invest your capital (usually a $25,000 or $50,000 minimum), and someone else does all the heavy lifting while you take part in the profits.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
Being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., Growability Equity and our sponsor team) to manage the property and execute on the business plan on your behalf.
Is Active Or Passive Investing Right For You?
Here are 10 factors to help you decide which path is right for you.
#1 – Tenants, Termites, Toilets and Calls at 3AM
If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role.
Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.
#2 – Time
Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.
#3 – Involvement
How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?
#4 – Profits
With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
#5 – Expenses
Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make an initial capital investment.
#6 – Risk and Liability
With active investing, if things go south, you may be personally held liable, which means you may lose not just the property but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.
#7 – Paperwork
Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.
With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.
#8 – Team
As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.
As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.
#9 – Diversification
With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.
With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.
#10 – Taxes
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year.
Which Will You Choose? Active or Passive Investing?
If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you. There were definitely parts of that active, landlord-type role that we each appreciated. It’s just important that you know up front that, while you maintain all control, these investments might usurp all your time too.
However, if the constraints of a bustling family and demanding career have your time cramped, but you know real estate holds the keys to generating true wealth, passive investing will support you toward the lifestyle of your dreams. Being a limited partner in a real estate syndication is fully passive, meaning you simply invest capital while maintaining your free time, allowing you to craft the lifestyle you want.
If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.
When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests. It’s unlikely you have any excess time for a side hustle if you’re really being honest. Your family is growing up before your very eyes and you’re already vying for a free weekend whenever you can!
We invite you to explore the possibility of your money making money, almost automatically, without any additional effort on your part through real estate investments.
This article was spot on and very timely. I was aware of the the dynamics associated with active investing/ownership through testimonials from others. I quickly realized that wasn’t for me. Passive investing is much more attractive to me due to lack of time required and the use of leverage.
Well said Michael. Thanks for your feedback.
I am a passive investor. It gives me extra for other activities.
Larry, I overlooked your comment. Thanks for your response. Passive investing has been powerful for so many of the people I know as both a syndicator and a passive investor myself. What do you look for in the passive investments you pursue?
We have a rental in a revitalized commercial area in Southern CA. Our challenge to increase the rent requires a “tough conversation”. Passive investing avoids that but does it re-capitalize on market opportunities?
Hi Bill, really appreciate your engaging. Can you talk a bit more about what you mean by “capitalizing on market opportunities”? I want to make sure I answer your question versus one I make up! Thanks.