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Active vs. Passive Real Estate Investing

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When it comes to investments, real estate is the most popular choice by many investors, followed by stocks and mutual funds. However, a common notion that prevails is that real estate investing is only for the rich who have a lot of spare money to buy and sell property on profits.

But is that always the case?

No. Real estate investments can be for anyone and not just for the wealthy. Whatever might be your income or risk tolerance, there are multiple ways to get started.

Whether you want to invest in a property or two or eventually want to leave behind your 9-5 job, real estate investments can be a viable option if you put in enough work.

But before that, there are two avenues of real estate investing that you need to consider: Active & Passive investments.

Active Investing:

Suppose you want to purchase a property with the intent to sell it for profits or generate income by renting it. In that case, it is basically an active real estate investment. This property can be anything from homes, duplexes to multi-family dwellings. Being an active investor means that you’re calling the shots and making every decision.

During active investments, you as an investor must be fully involved in the investment from beginning to the end, putting in YOUR time, YOUR capital, and taking the risk yourself.

Active investments also require some analytical skills to know the correct times to buy or sell, resulting in a hefty return on investments.

Passive Investing:

If you have some spare money but are short on time, getting into passive real estate investments is a good idea. In passive investments, you are required to put your money into a real estate-based mutual fund or trust.

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In passive investments, you can also make virtual investments by looking for virtual business addresses online. You’ll have the option to explore multiple properties in this way.

These funds can be used to purchase residential or commercial properties. If you have a lot of money, they can also be invested in a private equity group or a large syndicate like an apartment complex or mobile home park.

In passive real estate investments, you have no say in the properties being purchased. The sponsor is responsible for buying the properties and ensuring that everything runs smoothly. This is ideal for people who don’t have the time to put in the work involved in real estate investments.

Active VS Passive Real Estate Investing:

If you want to get into real estate investments, here are some of the factors you consider determining which one is the right approach for you. 

  1. Do You Have Time?

As mentioned earlier, active investing takes up a lot of time. You need to keep the property in shape if you plan on selling it. While you might not be going through everything yourself, you need to hire contractors and designers to ensure everything is timely.

Suppose you’re looking to rent out your real estate property. In that case, you need to collect the rent, repair it, and maintain it while also be available to your tenants, just in case.

You won’t have to do any of this if you’re investing passively. All you have to do is looking for a sponsor, and they will take care of everything. You will need to look at quarterly or monthly statements to check your investment’s performance.

  1. Do You Have The Investment Acumen?
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Active Investments involve finding the right property at the right time and selling it to generate maximum Return on Investment. Not everyone has this insight. An active real estate investor or real estate syndication company should be familiar with all the surroundings and the neighborhood and where to look for the best properties at the best time.

With passive investing, all you need to do is give your money to someone who has an excellent track record and can be trusted to invest in the right place. Choose a sponsor that has the relevant experience in where you’re looking to invest.

  1. Are You Looking to Diversify?

Active investments can somewhat limit your diversification options. You might own a few pieces of property to yourself, but you won’t have the opportunity of making multiple investments.

You would need to have a lot of capital to make the purchase on your own, and you’d also need to hire staff for maintenance.

In the case of passive investments, you’re a part of the bigger picture. There would be funds from multiple investors lumped into yours, and you would have the opportunity to walk away with healthy profits. 

  1. How much risk can you take?

This one is pretty evident that active investments carry more risks compare to passive investments. Pouring your resources into one basket will open up to a lot more risk. But the positive side is that if done correctly, you will get every penny of the profit.

With passive investments, you won’t be facing that much risk since you will be relying on some experienced sponsor, but the downside could be that the profit is split in multiple ways. The sponsor will also get a cut, and there would be other expenses as well.

  1. Do You Want All Control To Yourself?
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With passive investing, you don’t have much control over the significant decisions, so you must not hand over your money to just anyone. Carefully look into the sponsor and see if he has the relevant experience that you might be looking for. You can also work with a builder who specializes in constructing rental properties, like the Wan Bridge Group. That way, you have a bit more control over creating passive investment opportunities with a quality partner available to help. That will help lower risks a bit and set you up for better long-term returns.

You can lower this risk by setting up a contract with a preferred return. This would provide them with an incentive to work for higher returns on investments.

With Active investments, you’ll be in control of everything and would be the primary decision-maker.

Choosing to invest actively or passively is a very personal decision, and there is no right or wrong answer. However, each of them has its own risk and rewards!

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