Identifying the appropriate real estate strategy begins with figuring out what type of investor you plan to be. You can choose to be an active investor who is actively involved in the investment from start to finish, or you can choose to be a passive investor whose only role is providing capital. Consider the differences between active and passive investing to determine which strategy is right for you.
What is an active investor?
As an active investor you seek out and purchase a property directly. This strategy requires capital for purchasing the property, time, and a certain level of skill and real estate knowledge. The active investor is heavily involved in decision making and must be well versed in real estate and analyzing financials in order to maximize returns.
What is a passive investor?
A passive investor is someone who does not wish to participate in the decision making or managing of the property. The extent of a passive investor’s involvement is partnering with a firm to provide capital and in return they receive recurring distributions from the property.
Pros and Cons of Active Investing
The major benefit of being an active investor is higher returns. If you are actively involved in the investment, you don’t have to split the returns with anyone else. Being an active investor also gives you complete control. Although having complete control does have its advantages, it also means that you assume 100% of the risk. Some investment properties are riskier than others, so it’s the active investor’s job to do their research and have a meticulous process. This is why it is important for active investors to be knowledgeable about real estate investing.
Pros and Cons of Passive Investing
Passive investing can be great for individuals who want to make additional income, but don’t have the real estate knowledge or time to actively participate. The returns won’t be as fruitful, however, you receive a percentage of cash flow periodically without ever having to step foot on the property. Given that you are only providing capital and are not offering up any of your time, you won’t have any say in decisions regarding the property or how it's managed, which could be considered risky.
How to choose which strategy is right for you
Expertise, money and time are the three biggest contributing factors to examine when evaluating which investment strategy is most appropriate. If you have the money, but not the time or expertise then passive investing might be best for you. If you have the time and money, but not the expertise that does not necessarily mean active investing is out of the question. With the proper research, anyone can gain the knowledge required to be an active investor.
Partnering with a seasoned lender can help! Check out our blog post on the advantages of using a private lender to discover if private lending can fund your next investment!