Menu
When I first started investing in real estate, I thought that buying a small rental property and being a landlord was the only way to do it.
So, I invested in one rental property after another in my quest for financial independence. I knew I needed investment diversification and I was tired of relying on my W2 income to provide me the kind of financial security I desired.
But the more properties I had, the more time I had to put in to deal with the hassles of being a landlord, even with a property management company.
That’s when I discovered that you can actually invest in real estate without the headaches of tenants, toilets, and termites. It’s true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.
In this article, you’ll see what passive real estate investing means and find out whether you should be an active or passive investor.
I’m guessing you may be as surprised as I was to find out that this kind of investing is open to people like you and me – professionals working in their careers and trying to build wealth for a healthy retirement, and even some passive income to get our time back sooner.
When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, as the landlord you still have an active role in the investment.
Yes, your property manager may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
ents. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
Here are 10 factors to help you decide which path is right for you.
If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role. I know many people who enjoy this control over their investments and they are happy to deal with the associated headaches.
Otherwise, if the title to this bullet point makes you nauseous, you might seriously consider going the passive route.
Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.
How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?
With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors typically only make an initial capital investment.
With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.
Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.
With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.
As an active real estate investor, you will need to build your own team, including brokers, lenders, property managers, and contractors.
As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.
With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and likely visit the area.
With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year. One thing to remember is that you may need to file an extension if you don’t receive your K-1 before the April tax deadline and may to file an out-of-state tax return, depending on where the property is located.
If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you.
However, if your time is limited but you have capital to invest, passive investing could be right for you.
If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.
When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.
Here at Blue Elm Investments, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits.
If you’re accredited and looking to deploy capital, we invite you to sign up for our Investor Club to get access to our current or upcoming opportunities.
