Welcome to the blog. Today we will examine the difference between an active and passive real estate investor. Both are popular ways of investing, but each has its specific advantages—the deciding factor determining whether to be an active or passive investor is time and individual circumstances. An active investor will require much more time to be involved with the property’s maintenance, management, and finance. In contrast, the passive investor will be less involved, subcontracting the management duties to a third party. So let us look at both options.
A business plan and strategy are vital to the success of an active investor. An active investor will be directly involved in all aspects of the property, from identifying the property, financing it, and managing its day-to-day running. Usually, there are two types of investment property: buy to rent and the fix and flip model. These two investments require lots of time to ensure that they run smoothly and return a good profit. An active investor will most likely have the necessary experience to manage the logistics, contractors and financial contracts required to purchase and manage the property. As the sole person involved, they will receive a higher return if things go well but will also be exposed to the losses if they don’t.
Many of the active investors I know are people who enjoy working with real estate, have skills in design, good relationships with contractors and a keen eye for attention to detail. They will need to know exactly where they are going and what they want to achieve and be aware of their overall financial health. This includes their cash flow position, available assets and income to ensure that they can afford the property they select and be in a position to meet all expenses and contingencies involved. In conclusion, they will be the project’s boss, and the buck stops with them.
On the other hand, a passive investor delegates those responsibilities to a third party, so they do not have to get involved in the property’s day-to-day running. They may not have the time or expertise to handle the project in the way an active investor can, but that in itself is a good decision as they are aware of their limitations. In most cases, a passive investor will invest in a company that will identify the property, manage it, handle all the financial details and return a dividend to the investor. A passive investor can also partner up with an active investor to achieve the same result, so there are a few ways for the passive investor to become involved. Like a silent partner, they will invest the capital while the active partner will do all the work.
Their return on their investment will be less than the active model as more people are involved, but the risk is also shared as you are not buying the entire property. The investment can also be spread out over a range of properties, reducing the risk by not having all your eggs in one basket. While there is less effort in passive investment, due diligence in selecting the right company to manage your property is crucial for a passive investor. So do your homework and talk to a wealth advisor with experience in the real estate market to suggest reputable companies to work with. Another way to become involved as a passive investor is through crowdfunding projects and products offered by mortgage brokers. There are many options available, so talk to your wealth advisor, who will help you determine which is best for your situation. As always, I am available to help and answer any questions you may have, so please have no hesitation in contacting me. Until next time take care and invest wisely!
If you want to learn more about investing in real estate then join our free Facebook group by clicking right here!