When I first started investing in real estate, I thought that buying a single-family 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, but the more properties I had, the more time I had to put in to deal with the hassles of being a landlord. 

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.

What It Means To Be An Active Investor

When most people think of real estate investing, they think of the landlord hustle – buy a single-family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.

Landlords actually have so much work to do.

You have to fix the property when pipes break, roofs leak, or lawns need to be mowed. Even if you find contractors to do these things, you have to manage the work and often end up having to still do some yourself. You also need to screen tenants and fill vacancies. It may seem like once they are in place, it can get easier, but tenants move. Frequently. There is also filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

What It Means To Be A Passive Investor

On the flip side, you have passive investing, which is the “set it and forget it” type of real estate investment. You invest your money, and someone else does all the heavy lifting.

The great part about passive investing is that you are not involved in the day-to-day management of the property. With a stellar property management team, you receive regular updates, but are rarely required to do any work.

However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the property management team) to manage the property and execute on the business plan on your behalf.

The best type of passive investing is also having a team send you deals that are fully occupied, brand new, and cashflowing. This removes the work of having to source and analyze deals, streamlining your investing process even more.

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, Toilets, and Calls at 3 AM

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

Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.

#2 – Time

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, and sporadically to make higher strategic decisions.

#3 – Involvement

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? 

#4 – Profits

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 will also be used to pay for property management. 

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.

#5 – Expenses

Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make higher-level decisions, but don’t have to manage the actual work of carrying out the plan.

#6 – Risk and Liability

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, we recommend that the asset be held in an LLC. If anything goes terribly wrong, the veil is harder to pierce (as it is described in legal terms). Most active investors don’t take this extra step.

#7 – Paperwork

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 turnkey real estate investments, on the other hand, you typically have all the necessary steps to purchase lined up for you by the selling team. From there, good property managers keep track of expenses and books, sending summary statements to you, the investor, on a regular basis.

#8 – Team

As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.

As a passive investor, you rely on the expertise of the existing building and property management teams. These operators are experts in the market and typically already have systems implemented to manage a property.

#9 – Diversification

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 possibly visit the area multiple times.

With passive investing, it’s easy to find markets with strong growth dynamics, since you are working with a team that is already actively managing assets in them. You are investing with teams that have already taken the time to research those markets and build strong local teams.

#10 – Taxes

As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. 

As a passive real estate investor, you don’t need to do any bookkeeping. You receive updates from poetry management teams, which can be translated easily into the income and losses for that property. No need to track income and expenses throughout the year. 

Conclusion

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, you might want to consider being a passive investor.

When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.

Here at Invest 5S, we provide multiple ways to leverage the power of real estate in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits. 

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