Should I Take A Passive Or Active Approach To Real Estate Investing?

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There are many ways to successfully invest in real estate through both passive and active investments. While there are pros and cons to each strategy, it's important to choose a route aligned with your passion, expertise, time, and investment goals. We will discuss the roles to expect when deciding on a passive or active real estate investing strategy.

While there is no one path to financial freedom, the decision on whether to invest passively or actively should be dependent on one's passion, expertise, time, and investment goals. There is no right or wrong answer; similar outcomes can be achieved with either method. But it is important to choose the best route consistent with your ability to be involved in the day-to-day activities. Here are some key points to consider when choosing your passive or active investment strategy.

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Passive Investing:
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A passive investor's role is to invest capital with trusted and experienced sponsors (partners), whose objectives are to execute and deliver on the goals of the investment. For example: the passive investor will be part of a limited partnership, whereas sponsors will be part of the general partnership. Sponsors bring track record and experience to the partnership that a passive investor may or may not possess. A passive investor's goal is to forgo the daily and ongoing demands of being active and responsible for the investment, to receive monthly/quarterly updates, and to collect cash flow (returns) on their investment. A passive investor retains the same tax benefits as a sponsor.

If you're a busy professional, seeking real estate investments that offer higher risk-adjusted returns with more predictability and less volatility compared to traditional stocks, then passive investing may be a more favorable route. Additionally, it allows you to focus on other obligations and passions that may take the majority of your time.

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Active Investing:
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An active investor's role can be quite challenging and requires a compelling amount of education, experience, and expertise. Real estate is a team sport and requires you to perform a substantial amount of upfront work and daily activities before you are able to identify and secure an investment opportunity. Tasks include market research, sourcing deals, negotiating contracts, and identifying good team members (contractors, property managers, attorneys, etc).

Additionally, when the property becomes under contract, the active investor is required to manage the transaction, perform due diligence, and consult with relevant parties (mortgage brokers, insurance brokers, title companies, inspectors, etc). As the property is closed, they are also responsible for executing the business plan.

If you are able to devote countless hours to education and experience in real estate investing, active investing may be your route. It's important that you make a commitment to the daily activities and perform the necessary prerequisites of establishing your team; your success and other passive investors’ success will depend on it.

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Summary:
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Understanding that real estate is a team sport can help you achieve your financial goals, whether passive or active. There is no one way to successful real estate investing. Passive investing is a great way to achieve returns on your investment capital without the burden of being involved in day-to-day operations. Active investing achieves similar returns on your investment, but requires you to be involved in the ongoing activities of acquiring and managing the property. It is important to understand your investment goals while ensuring they align with other passions and obligations.

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Author: Yannik Cudjoe-Virgil

Yannik formed Merlynn Acquisitions in 2017. He has experience in portfolio asset management, real estate investing, investment analysis and financial modeling.