Did you know that you could invest in real estate without having to meet with tenants? Without having to fix broken toilets at 3am? And without having to meet with brokers and property managers?
Sounds like a dream come true, right?
That’s exactly what I was thinking when I first discovered this thing called passive real estate investing. In this article, I’ll help you gain a better understanding of what it means to be a passive real estate investor, and how to decide whether you should invest actively or passively in real estate.
My Experience as an Active Investor
When I first heard about passive real estate investing through real estate syndications, I’d been investing actively in real estate for about 10 years. In those 10 years, my husband and I had scrubbed mold and grease off walls and cabinets, gotten on our hands and knees to lay tile, and used buckets to remove flood water from basement units. #joysofbeingalandlord
When we moved from Washington, DC, to Vancouver, Canada, my husband, the kind of landlord who loves rolling up his sleeves and fixing things himself, decided he could do all the property management himself, from afar.
Yeah. Mm-hmm. I was shaking my head too.
Well, you can imagine what happened next. Two months went by, and everything sailed along, completely fine. Then, all in one week, DC experienced two massive storms, and everything went wrong at once.
The next week? You guessed it, we had a property manager.
Still, even with a professional property manager to manage the properties, I still considered ourselves active landlords, as we were still involved with tenant selection, lease renewals, decisions on turnovers and maintenance, and on and on. It was less hands-on than self-managing, but it was by no means completely hands-off.
My Experience Becoming a Passive Investor
Fast forward to today. While we still have dozens of rental units in multiple states that we own ourselves, either self- or professionally managed, my favorite types of real estate investments are now passive real estate investments.
These are the kinds of real estate investments where I can write a check to invest alongside other investors, and a team of professionals takes over the day-to-day operations, sending me quarterly dividends.
These are the “set it and forget it” investments of the real estate world.
Are the returns lower as a passive real estate investor? Of course they are. It’s like cleaning your own house, versus having a professional do it for you. You might save some money doing it yourself, but you’re putting in time and sweat equity, and the house may not be as clean as if a professional did it.
Now that I have kids, my time is much more valuable than the slightly higher returns I would get as an active landlord. I would much, much rather take my kids to the playground, rather than review tenant applications.
Deciding Whether You Should Be an Active or Passive Real Estate Investor
Perhaps you’re on the fence as to whether investing passively in real estate is the right move for you. Maybe you’re curious about being a landlord, or you’d like to try your hand at flipping a property, or you’re still in the early research phase of getting started in real estate investing.
I totally get it. There are a lot of things to think about, and deciding how best to invest your money can be a tough decision.
Here are 10 things you should consider when deciding whether to be an active or passive real estate investor.
#1 – Tenants, Termites, and Toilets
The first thing you should consider is whether the words above – tenants, termites, and toilets – excite you or terrify you. If you’ve always wanted to become a landlord, and the thought of screening tenants, marketing your own property, and rolling up your sleeves to improve a property are things that thrill you, then perhaps you should consider taking a more active role in your investments.
If, on the other hand, you don’t want to touch any of those with a ten-foot pole, then perhaps you should take a backseat and become a more passive investor.
#2 – Time
How much time do you have to devote toward your real estate investments? Active real estate investments require substantially more time, both during the initial acquisition, as well as throughout the lifecycle of the project.
With passive investments, on the other hand, you do some upfront research and vetting, but once you invest, you do not need to put in any additional time.
#3 – Involvement
I used to love the hands-on nature of designing a kitchen rehab, picking out the finishes and patterns. I’m now at a point in my life when I’m happy for someone else to take the lead on those types of decisions.
As an active real estate investor, you get to choose those designs, vet tenants, and make decisions on renovations and upgrades. As a passive real estate investor, you put your trust in someone else to do those things.
Think of it like an airplane ride.
The active investor is the pilot. The passive investors are passengers.
Everyone on the plane is going to the same place, but their levels of control and involvement are very different.
#4 – Profits
As an active real estate investor, because you are putting in the lion’s share of the time and work, you are also rewarded with the lion’s share of the profits. As a passive real estate investor, you will be sharing your profits.
However, keep in mind, that just because you are sharing profits, that does not necessarily mean that your return on investment will be lower than if you were to invest actively. It all depends on the individual deal, market, loan terms, and other aspects.
#5 – Expenses
As an active real estate investor, you will need to plan for ongoing, upcoming, and unforeseen expenses. You might save some money each month for capital reserves and emergencies, but in the event that something bigger goes awry, you may need to put more money into the investment, and/or deal with insurance claims.
In most cases, as a passive real estate investor, your original investment is the only capital you’ll need to put in for the lifecycle of the project. If unforeseen circumstances come up and are not able to be covered by the capital reserves or other buffer, you may see lower returns for a while, but it’s rare that you would need to put in additional capital.
#6 – Risk and Liability
Things are all well and good when tenants are happy and your property is doing well. But what about when unexpected things pop up?
With an active real estate investment, depending on how you structure it, you could be held personally liable, and your tenants could come after your other assets, so it’s important to take steps to protect yourself and your assets.
With a passive real estate investment, your liability is limited. You are investing in an LLC or LP that holds the asset, so your stake in it is limited to the amount you invest. If all hell breaks loose on the property, the worst case scenario would be that you would lose your original investment; your other assets would not be in jeopardy.
#7 – Paperwork
As an active real estate investor, you should be prepared for a lot of paperwork, both during the acquisition of the property, as well as through the bookkeeping, reports, and legal documents needed throughout the lifecycle of the project.
As a passive real estate investor, you sign one document up front, then receive monthly email updates, quarterly financial reports, and an annual K-1.
#8 – Team
As an active real estate investor, you typically put together your own team. You choose the broker, property manager, and contractors you want to work with.
As a passive real estate investor, you invest in a team that’s already put together. The deal sponsor team will have already identified the broker and property managers they want to work with, so you leverage their shared expertise.
#9 – Diversification
This is one area where I think being a passive investor really gives you the upper hand. Because passive investing doesn’t take as much of your time, nor do you need to be hands on, you can invest your money into more assets. Further, those assets don’t have to be local, as you are leveraging the expertise of teams on the ground in each target market.
As an active investor, you must be an expert in whatever asset class and market you’re investing in, which takes time and energy, so your ability to diversify into multiple markets and multiple asset types will be limited.
#10 – Impact
On the impact front, you should consider whether you want to have a broad or deep impact.
As a passive real estate investor, because you are able to invest in more and bigger projects, your money goes farther and has the potential to impact more people, families, and communities. However, your direct contact with those tenants is limited.
As an active real estate investor, you can have a deeper relationship with your tenants, if that’s what you desire. We have good friends to this day who started out as tenants in our rentals.
The Real Estate Investing Spectrum
The good news is, if you’re not 100% sure whether you want to invest passively or actively, there are options in the middle as well.
If you’re ready to roll up your sleeves and manage your own fix-and-flip like an HGTV pro, you’re likely on the active end of the spectrum. If you’re strapped for time and just want to put your money in to an investment with stronger and more reliable performance than the stock market, you’re likely on the passive end of the spectrum.
But if you’re thinking that you might be in the middle, look into turnkey rentals and buy-and-holds, as they may give you some of that control, without a huge time investment.
Should You Be an Active or Passive Investor? Take the Quiz!
If you’re on the fence, check out the quiz below to find out where on the spectrum you land. You can download a PDF version of the quiz here.
Investing in real estate is a great way to build passive income, create long term equity, and have an impact on people and communities. Whether you invest passively or actively is up to you and your unique situation, goals, and interests.
Either way, there are opportunities aplenty out there for you, so you may want to try both ends of the spectrum.
If you’re interested in learning about more passive real estate investment opportunities, consider signing up for the Goodegg Investor Club, and we’d be happy to share our latest offerings with you, so we can partner together to change the world, one investment at a time.