Active VS Passive Real Estate Investing-Which Should You Choose?

"Risk comes from not knowing what you're doing." - Warren Buffett

Did you know that you could 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.

When I first started investing in real estate, it was with single-family homes. These can be great, depending on how much you value your time. I've received late-night calls from tenants, had to use vacation days for court dates, and spent Saturdays cleaning after tenants moved out.

Don't get me started.

If you have a busy career, a family, and don't want to receive late-night calls when the furnace goes out, investing in rentals may not be the best fit for you. I learned this the hard way, which is why I switched to investing only in real estate syndications.

In this article, you’ll learn what passive real estate investing means and find out if you should be an active or passive investor.

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buying a single-family home, finding a renter, and collecting monthly rent income. Sounds easy enough, but the reality can be quite different.

Even with a professional property management team, you as the landlord still have an active role in the investment. The property managers may handle day-to-day issues, but you will still need to make strategic decisions, including evictions, insurance claims, and sometimes adding funds for maintenance and repairs.

What It Means To Be A Passive Investor

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 means that you relinquish some control and trust the sponsor team to manage the property and execute the business plan on your behalf.

Should You Be an Active or Passive Real Estate Investor?

Here are 10 factors to help you decide which path is right for you:

1. Tenants, Termites, and Toilets

   If you’ve dreamt of becoming a landlord, having tenants, and making improvements, consider an active investor role.

   If the thought makes you nauseous, go the passive route

2. Time

   Active real estate investments require more time during acquisition and throughout the project lifecycle.

   Passive investments only require time upfront for research.

3. Involvement

   Do you want to manage the property, field tenant requests, and handle maintenance?

   Or do you prefer to sit back while someone else handles everything?

4. Profits

   Active investing means you keep all net profits.

   Passive investing profits are shared among investors, but returns depend on each deal.

5. Expenses

   Active investors should plan for insurance claims, emergencies, and repairs.

   Passive investors make an initial capital investment without ongoing expenses.

6. Risk and Liability

   Active investors are personally liable if things go south, potentially losing other assets.

   Passive investors’ liability is limited to their investment, usually held in an LLC or LP.

7. Paperwork

   Active investments involve extensive paperwork from purchase to ongoing management.

   Passive investments typically require signing a single PPM (private placement memorandum).

8. Team

   Active investors need to build their own team, including brokers and contractors.

   Passive investors rely on the sponsor team's expertise and existing setup.

9. Diversification

   Active investors need to be market experts and may require local presence for investments.

   Passive investors can easily diversify across markets without starting from scratch each time.

10. Taxes

    Active investors handle bookkeeping and depreciation with their CPA.

    Passive investors receive a Schedule K-1 each spring, simplifying tax preparation.

Conclusion

If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing might be the perfect adventure for you.

However, if your time is limited but you have capital to invest, consider being a passive investor.

For a middle-ground option, turnkey rentals and buy-and-hold strategies offer some control without a huge time investment.

When deciding which path is right for you, consider your unique situation, goals, and interests.