Active Investing Vs. Passive Investing: Which Method Is Right For You?

When discussing real estate investing practices, the idea of active versus passive investing is often one that is the root of many heated debates amongst investors. Like many other investment practices, there are strong pros and cons for each method, however, understanding the complexities of each and how they relate to your specific investment needs is what’s most important.

Active Investing

Active real estate investing can be characterized as the name implies: an active, hand’s on approach to purchasing and managing properties, either for rental income or to renovate, flip and sell a property for financial gain. Investors that utilize active investing are involved in every step of the process: finding the property, performing due diligence, obtaining of financing or a hard cash-loan to acquire the property and the managing of the investment once acquired.

Some of the key benefits of active investing:

• Complete control over buying
  • As an active investor, you have complete control over specific deal selections and attributes of acquired properties including location, size, type of property, condition, and other influential factors.
• Authority over all management and budget decisions
  • Once the investment property is acquired, an active investor has complete control over all budget and management decisions made. These decisions, if made appropriately, could result in a healthy return on investment and/or additional monthly income.

Some common stressors of active investing:

• Budget limitations
  • Although an active investor has complete control over budget and all decisions made regarding acquisition, renovation, and/or management of a property, active investors often find themselves financially limited, allowing them to have only one to a few projects maximum. Budget limitations can also affect the investor’s ability to make and finance decisions that will yield maximum return on investment.
• Unexpected expenses and day to day stresses of management
  • Whether purchasing a property to flip and sell or to acquire and manage for the rental income, unexpectedly expensive renovations and issues often arise after the acquisition of a property, often adding an additional element of stress, mentally and financially, to the investor. An active investor can also expect to deal with the day to day stresses of owning or managing a property including complaining tenants and unexpected maintenance issues.

Passive Investing

Passive real estate investing, however, can be characterized by the purchasing of real estate-related mutual funds or REITs (real estate investment trusts). Unlike active real estate investing, passive investing features another entity managing the investment. Once the investment is made, all return on investments is dependent on the decisions made by the entity or organization that is responsible for the policies and management of the investments.

Some advantages to passive investing:

• Less demand on investors’ time
  • Because another entity is managing the investments, it frees up time for investors to devote to other projects or demands.
• More stability
  • Although stability can be objective, the process of passively investing can generally be a more stable process. The minimum investment for passive investments can widely vary depending on the type of investment, however, once the investment is made, the rest of the process is handled by the managing entity.

The biggest pitfall of passive investing:

• Less control
  • Although passive investing is less demanding on an investor’s time because someone else is managing the investment, it also gives the investor little to no control over the investing entities investment policies. Generally, the only control a passive investor has is to buy or sell their investments and how many shares to own.
  • Having less control requires the investor to really trust the investment policies of the managing entity to ensure that your shares produce profits and not losses.

Many investment advisors infer that successful investing isn’t merely about return on your investment, but also managing risk factors effectively to promote continued healthy growth of investments with minimal setbacks. It’s important to understand your limitations and invest wisely using the strategies that best compliments your financial and personal needs!