Is it Better to be an Active or Passive Investor in Multifamily?

With the recent hype and explosion of education around multifamily investing, many people have come to see its lucrative benefits. Much of the educational material available is geared towards active investors who want to find, purchase and run multifamily properties on their own. However, many people are interested in investing passively without having to do all the work. Today, we will review some of the pros and cons to being both an active and a passive investor.

The Securities and Exchange commission allows for syndications via regulation D. A syndication is simply a group investment where there are people who are actively running the project and others who are merely passively investing in it. Within a syndication, the active and the passive investors each have their own roles and responsibilities are described in the following paragraphs.

Active Investor

An active investor is responsible for all the moving pieces that go into a multifamily investment. This is includes being able to find and recognize a good deal with opportunity, get said deal under contract and to closing, and then executing on the prescribed business plan for several years. Many active investors choose to go through a mentorship or education type program in order to help prepare them for the challenges that come with these tasks. Active investing allows one to capitalize not only on their financial investment into a project, but also their efforts which means the returns are typically higher for the amount of capital contributed. On the negative side though, there can be much higher financial risk getting projects to closing since the active investors are responsible for all the earnest and risk money that goes into a project. There is also the consideration of the challenges that come with owning and operating a business which are the sole responsibility of the active investor on a syndication.

Passive Investor

Being a passive investor also has it's set of pros and cons. As the name suggests, passive investors are able to invest their capital without doing any work on the investment whatsoever. This is a fantastic opportunity for busy professionals who have funds they want to invest or people who simply do not enjoy the sometimes stressful challenges that come with being an active investor. The downside of being a passive investor is the lack of control that they have on a project. Typically, the active investors will have the sole decision making responsibility providing they are within the bounds of the prescribed business plan. Some investors might see this as a negative while others might feel relived to have a professional investor making the decisions and running the investment project.

Needless to say, determining whether active or passive investing is better for a particular individual is a very personal decision. Most active investors also invest passively, but a lower number of passive investors wind up making their way to the active side.