Ten Factors to Help You Decide Between Active and Passive Real Estate Investments

by | Jul 6, 2022 | Investing Advice | 0 comments

When I started investing in real estate in my 20s, I thought owning property and being a landlord would be the best way to help me find flexible, solid income. 

In fact, I thought being a landlord was the only way to make money in real estate. So I got into student housing and made decent money, but I didn’t want the continued hassles, so I eventually sold the property. 

I got out of the real estate business for almost 20 years, started my own tech business, and didn’t think about real estate until a few years ago when my dad needed some help.

We looked at real estate as a way to secure a good retirement, but I quickly realized we needed a better way to scale than active investing. 

That’s when I discovered that you could actually invest in real estate without the headaches of tenants, toilets, and termites. It’s what our family needed–all of the benefits of real estate investments with none of the hassles. 

In this article, you’ll see what passive real estate investing means and look at ten factors that will help you decide whether to be an active or passive investor. 

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buy a single-family home, find a renter, 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 active role in the investment.

The property managers may take care of the day-to-day issues. However, you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

What It Means To Be A Passive Investor

On the flip side, passive investing is the “set it and forget it” type of real estate investment. You invest your money, and someone else does all the heavy lifting.

The best 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.

However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute the business plan on your behalf.

Should You Be an Active or Passive Real Estate Investor?

Here are ten factors to help you decide which path is right for you.

#1 – Tenants, Termites, Toilets, and Calls at 3 AM

If you’ve dreamt of becoming a landlord, having tenants, and making improvements, consider an active investor role. In this role, being a landlord is a full-time job. You are responsible for overseeing the property and are on call almost constantly. 

On the other hand, if you are looking for passive income while you travel with your family or to secure your retirement, you will want to choose the passive investing route. 

#2 – Time

Active real estate investments require more time during the initial acquisition and throughout the project lifecycle. As long as you have the property, you will be actively involved in decision-making. If you are a hands-on person with the time to put into the landlord position, you’ll want to be an active investor.

If you don’t have the time to deal with tenants or the desire to be tied down to the nuts and bolts of a piece of property, passive investments are much better for you. Passive investments only require your time upfront during the research phase. After that, your time is your own. 

#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? If this appeals to you, active investments are for you.

If the thought of being involved in the daily running of the property has kept you out of real estate, then you should become a passive investor. 

#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; 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. None of these ongoing investments into the property is entirely predictable.

Passive investors only make an initial capital investment. Once you know the amount of that investment, you can plan accordingly, knowing you aren’t going to be required to invest more later. 

#6 – Risk and Liability

With active investing, if the investment falls apart, you are 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.

On the other hand, with passive real estate investments, you typically sign a single PPM (private placement memorandum) to invest in the property. There is 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 group set up to manage the property.

#9 – Diversification

With active investing, you need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you 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. Instead, 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 correctly depreciating the asset’s value 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. So you’ll not need to track income and expenses throughout the year. 

Choosing Between Active and Passive Investments

If your personality and lifestyle goals fit the boots-on-the-ground role of being a landlord, active investing is right for you.

You’ll want to calculate the time and risk factors involved thoughtfully. If you have a full-time job or family, seriously consider if you have the time and energy to do the following:

  • Manage tenants
  • Do repairs and maintenance
  • Build a great team
  • Handle paperwork and taxes
  • Assume all liability, risk, and ongoing expenses

If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, go for it! 

However, if your time is limited but you have the capital to invest, passive investing fits your situation perfectly. 

The purpose of passive investing is to create a life for you and your family that is free from worry and full of love and adventure.

Your investments will be passive, but your lifestyle will be active!


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