Active or Passive Investor: Which one are you?

What’s the Difference?

The world of investing can be overwhelming, stressful, and time consuming.  You can invest in a multitude of vehicles like stocks, bonds, real estate, commodities, etc.  Your life is busy, and most people don’t have the time to spend hours performing the proper due diligence required to see desired results.  So, what do you do?  A common example is investing in individual brokerage or retirement accounts.  For accounts such as these, you may have a financial planner manage your portfolio. Financial planners are the experts when it comes to investing your assets into securities, and it is their job to make sure your hard-earned money is performing the way that it should.  This allows you to build wealth without having to sacrifice your time. This is what we call Passive Investing, and you can apply this across all types of investments.

Now, let’s say you choose to go down a different path.  You research and analyze multiple stocks, bonds or properties.  You personally perform all the due diligence required to make a sound investment.  You have spent hours, weeks, or even months reviewing the nitty-gritty details.  Then, you finally have it all planed out and you decide to buy those shares or rental properties.  Now the fun really begins, because you will have to continuously manage these investments and make sure that they are performing up to par.  An immense amount of your time and energy have now been poured into this investment.  When you yourself are in the trenches and managing the day to day work, then you have entered the world of Active Investing.

Depending on your desires, it is safe to say that, as an investor, you will find yourself leaning towards one type of investing over the other.  For the sake of this article, let’s focus on what active versus passive investing looks like for one of the most powerful investments out there: Real Estate.  

Actively Investing in Real Estate

When you are an active real-estate investor, you are handling the entire process from start to finish. Simply put, you are constantly involved in maintaining the property and its success. Although you benefit from higher returns as the active investor, there is a lot more that comes with that. For this example, let’s assume you want to purchase an apartment complex. 

Below are just some of the responsibilities of an active investor:

·       Land Lording

·       Bringing investors to the deal

·       Deal Flow

·       Market Research

·       Underwriting/Financial Analysis

·       Communication w/ Brokers & Sellers

·       Collecting Rent 

·       Negotiating

·       Property Management

·       Hiring Staff 

·       Handling Repairs & Maintenance 

·       Renovations

This list goes on and on.  The common theme we see with an active investor is that it is a large time commitment, and the investor is the one holding the risk.  The active investor is the expert and will be the one responsible for not only making sure the operation runs smoothly but that the property hits its returns.  

Passively Investing in Real Estate

Passively investing in real estate takes away the long grocery list of responsibilities that an active investor is faced with.  Sticking with the example of buying an apartment building, the passive investor’s role is to simply contribute capital to the deal.  This allows the active investor to go ahead and purchase the property.  If not for the passive investor’s capital, this deal might not have been possible. As a reward, the passive investors will gain equity in the deal as well as a return each quarter.  This is the beautiful part of passively investing in real estate. Little to no work is required, and the investor will receive quarterly cash payouts, tax shelters against income, and additional profits at the time of refinancing or selling the property.  As a passive investor, the major homework assignment is making sure you trust the active investor.  The active investor will be the one responsible for improving the property, increasing the income, and making sure the passive investor receives respectable returns. 

Should you be an Active or Passive Investor?

Now that you have a better idea of how these two types of investors compare, you can make an educated decision on which type fits your lifestyle.  Both avenues are excellent paths to build wealth, but it is up to you, the investor, to make sure you are comfortable with any investment being made.  Evaluating your desired returns, personal allocation of time, long-term goals, and overall risk are all imperative in making the correct decision for you.