Active vs Passive Investing | What is Passive Real Estate Investing?

January 30, 2021
January 30, 2021 disrupt

Active vs Passive Investing | What is Passive Real Estate Investing?8 min read

Active vs. Passive Investing: An Overview

Investors and wealth managers commonly debate about which form of investing is better; active or passive investing. Below, we will compare and contrast active vs passive investing and provide you insight into one of the most lucrative passive real estate investing vehicles, multifamily real estate syndications.

What is Active Investing?

Active investing is a hands-on approach to investing. It requires an investor to actively buy or sell investment assets. After an active investor purchases an asset, they must constantly monitor and manage its activity and operations. Unlike passive investing, active investing is highly involved. Notably, investors are participating in every phase of the deal, from obtaining financing to finding the property and guaranteeing the mortgage, and subsequently managing the asset as it pertains to real estate.

While real estate investments are one of the best ways to generate income, especially when you consider the number of tax benefits and how many investors are either too busy or do not have any desire to be a landlord or real estate syndicator.

For the most part, an active investor in single family real estate will purchase a property directly and oversees the property themselves. In terms of commercial real estate, active investors typically have a team of property managers to assist them; however, the final decisions typically rest on the active investor(s). With this approach, as you can see, there is still a considerable amount of work, and the investment is not 100% passive. Most investors prefer not to be involved with this type of situation.

As an active investor in the direct-ownership of an asset, you will, however, receive most if not all of any profit that the asset generates. In any event, investing in a passive real estate opportunity, such as multifamily real estate syndication, allows investors to reap the various benefits of owning real estate without having to be responsible for managing it.

 

What is Passive Investing?

In general, passive real estate investing involves investing your resources and capital into real estate without being responsible for any of the property’s day-to-day management.

Additionally, most passive investors do not have to go out and find investment opportunities on their own. In most cases, they are presented with opportunities from active investors.

Once active investors find an attractive opportunity, the investor provides their capital and reap all the benefits with little to no effort. If you’re looking to create a financially free lifestyle generating passive income through real estate syndications should be at the top of your portfolio goals.

 

Benefits of Passive Investing

Before discussing the top passive income investments, it’s important to consider that passive income investing does not mean investors do not have to do anything regarding their assets.

Contrary to popular belief, passive investing is more than just picking an investment, contributing your money, and never thinking about the asset again.

Instead, passive investing simply means that you aren’t playing an active role in overseeing your assets on a day-to-day basis.

 

Diversification | Active vs. Passive Investing

It is quite difficult to create a diversified real estate portfolio when you’re primarily an active investor. Notably, most active investors keep their assets pretty close to their primary residence for ease of access should they need to visit the property, etc. However, as a passive investor, you can greatly diversify your real estate portfolio.

Particularly when you invest in a real estate syndication, you own a portion of a larger deal. As such, it is easier to diversify your portfolio across multiple deals and sponsors.

Additionally, you are not stuck with investing in one asset class when you spread your capital across various real estate syndications. Instead, you can choose different asset classes across different geographical locations. The best part about investing in real estate syndications is that you are not relying upon your own experience. Instead, you are relying upon the expertise of experienced sponsors and their teams.

 

Risk | Active vs. Passive Investing

In general, passive investors are exposed to a lot less risk compared to active investors. Notably, when you invest in real estate syndications or other passive investment methods, you are tapping into a proven investment project run by experienced sponsors who have completed similar deals in the past. Additionally, as long as the Sponsor remains conservative when they underwrote the deal and continue that strategy while managing the syndication, you can typically expect your projected return to exceed the original projection.

On the other hand, active investing is a much riskier investment strategy. Keep in mind that when you are an active investor, you typically have to personally guarantee each loan/mortgage within your portfolio. This in itself exposes you to many risks as you own 100% of the deal, but you also bear 100% of the losses.

 

Time commitment | Active vs. Passive Investing

Passive investing is beneficial because it involves less time commitment compared with active investing. Specifically, when you actively invest in a property, you are required to oversee the property’s maintenance, any major repair, collecting rent, and handling all property issues that may arise. This is true even if you have a reputable property management company overseeing your asset. In general, your investment will not be completely hands-off. Therefore, if you are truly seeking a 100% hands-off investment, then passive real estate investing is the way to go.

Other Forms of Passive Investment Vehicles Include the following:

Real Estate Funds

The major distinguishing factor between real estate funds and real estate syndications is that investors invest in real estate funds blindly.  The means that investors must trust fund managers to execute their business plan. With real estate funds, the operators raise capital from multiple investors and then use them to purchase multiple properties.

Crowdfunding 

Crowdfunding is a term commonly used to describe how passive investors can participate in real estate deals.  Typically, crowdfunded deals are discovered online. A crowdfunded deal typically permits investors to pool their money together to purchase real estate assets.

REITs 

REITs (Real Estate Investment Trusts) are corporations that own commercial real estate. When someone invests in a REIT, they’re not actually purchasing real estate. Instead, they are purchasing a share in a company that owns a real estate asset.

 

Multifamily Real Estate Syndications | Active Vs Passive Investing 

Multifamily apartment real estate syndication is one of the very few ways investors can truly operate 100% passively. This is the primary reason why multifamily real estate syndications have become particularly popular over the last couple of years. It opens up a whole new world and income stream for real estate investors.

Syndications are different from real estate funds because the asset or opportunity is identified, and money is being raised from investors specifically for that asset.

Multifamily real estate syndications occur when multiple investors pull their money together to purchase multifamily real estate assets. In exchange for an ownership interest in the multifamily syndication, the investors will supply the cash and resources needed to finalize the deal. A multifamily syndication sponsor or General Partner will be responsible for locating the multifamily asset for the deal. Additionally, the Sponsor will arrange the financing and ensure that the deal closes. Once the deal closes, the Sponsor will still be responsible for oversight and property management. While any type of real estate asset can be used in a syndication deal, multifamily real estate syndications are probably the best and most popular.

The best part is investing in multifamily real estate syndication is truly a 100% passive income opportunity. The syndications are superior to other types of passive investment for several reasons. Multifamily Real Estate Syndications provides cash flow, appreciation, and equity. Syndications allow passive investors to participate in larger-scale deals that they probably would not be able to afford independently. Additionally, unlike investing in a blind fund or a Real Estate Investment Trust (REIT), investors can actually select the type of property they want to invest in. Their cash invested is protected by the multifamily real estate asset.

By investing in multifamily real estate syndications, you do not have to be an active landlord. Likewise, you don’t have to worry about obtaining financing for new acquisitions.  Your passive financial investment allows you to leverage other people’s time and experience in managing your asset. At the same time, you receive passive income distribution and can receive tax advantages from your investment, all while having access to larger investment deals.

Bottom line

When examining our active vs passive investing comparison, each option has positive aspects.

If you have access to various deals,  have a lot of time, and feel confident in building a team, active investing may be right for you.  However, if you’re like most investors who have other jobs and family responsibilities, passive investing may be a better fit.

Partnering with a reputable syndicator and passively investing in multifamily real estate syndications is a terrific way to diversify your real estate investment portfolio and generate passive income with little effort.

 

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