If you are reading this blog, you are probably either actively involved in real estate investing or are giving serious consideration to the same. One of the questions you will likely have is about how much involvement do you want to have in your projects.
In other words, do you want to be an active or passive investor?
What Does An Active Investor Do?
Active investors are involved in every facet of a real estate deal from the purchase of the land, development of plans, obtaining any approvals, construction management and then the overall management and maintenance of the property. The active investor brings not only the money to the table, but also the boots on the ground!
As an active investor you are required to bring all of the knowledge and skill sets to the table in order to develop and manage your portfolio. If you are simply buying a house to rent, you probably do not need much knowledge or skills, and likely your lawyer and accountant are the only professionals you will need to help you manage your portfolio.
If you are intent on being more aggressive in your real estate ventures, including: renovations, quick flips, new construction and _______, as examples, then the work load and knowledge bases is more intense. As an active investor you will need to know about many more facets of the real estate game. You you will need to know something about construction and working with contractors. You will likely need to know about the various government planning legislation. You will likely be directly involved in mortgage negotiations. As an active investor, you are going to want to spend much more time on sight.
Obviously, as an active investor your free time, isn’t too free! That’s OK if real estate investing is your only “game”. But, if you are busy working, spending time with friends and family, there is much less time available to spend on your projects.
Pro’s of Being an Active Investor:
Real estate is fun! Maybe you’re gonna get down and dirty doing a renovation and achieve that sense of satisfaction on completing a home renovation.
You have greater control over your projects and your overall real estate portfolio.
If you are a very active investor, you may have few participants in your project leaving more of the profits in your pocket.
Cons of Being an Active Investor:
Can be very time consuming. Maintaining work-life balance can be more difficult or you are forced to limit the number of projects you can complete.
Can be more difficult to scale your real estate portfolio, while being focused on each of your projects, one-at-a-time.
You must have an extensive array of knowledge, skills and experience to manage your projects in order to avoid potentially troublesome construction difficulties and potential cost overruns.
Typically more limited in the scope of projects you are going to get involved in. For example, you probably will not build a twenty-unit building.
What Does A Passive Investor Do?
As a passive real estate investor, you can take a much more hands-off approach to developing your real estate portfolio. You will likely be involved in selecting which projects you will invest your money, but ultimately leave the actual construction and management of the project to your partners. Ultimately, the passive investor’s job is bringing capital to the table to get a real estate project off the ground.
As a passive investor, you can become involved in much larger scale projects without having to be an expert in “zoning” laws, for example. You do not have to strap on a pair of construction boots and start hanging drywall. As a passive investor, you can let others do the heavier lifting while you focus on maintaining work-life balance. Then you simply reap the benefits of a successful project.
Being a passive investor does not mean you do not know what’s going on. Quite the opposite, if you have partnered with the right people, you should know exactly what is going on with your projects at all steps, from acquisition, planning, constructions, stabilization and ultimately the sale of the project.
Pro’s of being a Passive Investor:
Your direct involvement with the day-to-day aspect of a real estate project are limited, giving you freedom to engage in other activities that are important to you: work, family, and social life.
You do not have to be a real estate expert. You will be able to tap into the knowledge, skills and expertise of people you are partnering with to get the job done.
You may be able to scale your real estate portfolio quicker by investing with other investors, and developing larger scale projects than you might otherwise do on your own.
As a passive investor, you will likely team up with others and you can share the risk of real estate investing.
You can take advantage of the knowledge, skills and experience of others who have likely been involved in real estate investing longer than you.
If you are doing things right, you will team up with a group of people you can trust and developing lasting personal and business relationships.
Cons of being a Passive Investor:
It is more hands-off. If you are a person who needs control, being a passive investor may be more difficult for you.
Is There A Sweet Spot Between The Two?
The discussion above is set-out in extremes. There are obviously many different ways to structure your real estate investing ventures. How you structure yourself will always depend on your personal goals, your skill sets and the time you want to invest.
Why not drop us a line to discuss. We are happy to learn about you and share our experiences as active and passive real estate investors.