Active vs Passive Real Estate Investing

Buying real estate is a great way to add an additional source of income to your portfolio. Whether that income is passive is up for discussion depending on the situation. 

Many investors buy real estate hoping for passive income and find out it is more on the active income side of the ‘scale of passivity.’ Let’s take a look at both and see what works best for you!

What is active real estate investing?

Active investing is how most would describe the ownership of an investment property.  The active part of it means you have a high level of involvement.  This can come in the following forms:

Flipping

Wholesaling

Managing

Buying

Selling

In these examples, the investor is contributing their time and energy.  They are highly involved in the day-to-day process.  The type of time commitment required in all of these activities can easily be equivalent to a part-time or full-time job. 

Advantage of active real estate investing

While it may seem that active investing is simply the addition of another job, there are a few advantages.  If you have the skills to renovate property, you’ll save thousands of dollars in labor costs had you contracted the work out. 

If your higher level of involvement can result in higher profits, this may be something to consider.  

What is passive real estate investing?

Passive real estate investing is an approach with much less involvement, a more hands-off approach.  If you are in a position of lacking time but want to put your money to work, this may be a good option.  Here are a few examples:

Real estate funds 

REITs

Real estate crowdfunding

Buy and Hold strategy with management

REITs, or real estate investment trusts, allow anyone to own or finance properties through the purchase of stock. Similar to how a corporation provides periodic dividends based on profit, REIT shareholders earn a share of the income produced by the investment.

Similar to a REIT, where you don’t have to go through the hassle of finding, financing and renovating, you can invest in a crowdfunding company that specializes in real estate. Crowdfunding refers to the raising of capital from a pool of individuals to finance a project.

These are both great ways to invest in real estate without having to own or manage a physical property.  

REITs fall into the institutional investor category.  This means they are complex, regulated financial products and may require higher minimum investments compared to crowdfunding platforms.  

Advantage of passive real estate investing 

A truly passive real estate investment will require virtually no time and energy after the initial capital investment.  The biggest advantage of a passive approach is that you can still invest in real estate while focusing on other work and projects. 

Active vs Passive Real Estate Investing: Which is best for you?

Two factors that go hand in hand when it comes to your strategy is your time and money.  If you have some extra capital but no time, you may want to start with a passive option. 

Another factor is your personal skills.  Do you have the knowledge to take on a rehab project? If so, the active approach may be the reason your investment can be profitable. 

My take on active vs passive real estate investing

Let’s make sure we’re crystal clear on the passive investing concept…no investment is truly passive. In fact, the words ‘real estate’ and ‘passive’ rarely should be in the same sentence. 

I incorporate both strategies into my portfolio. I have physically purchased multifamily properties, done the work, and actively manage them. I wanted to go through this process so I understood the rehab costs and tenant selection process. With that being said, to take on something like this is a ton of work, but it’s worth it. I like the concept of building equity myself rather than paying someone else. 

On the other hand, I diversify by investing in real estate crowdfunding platforms that invest in commercial real estate projects around the country. This is another way to put my money to work in real estate in a more passive way. The major trade off is a minimal return compared to an active strategy. The owner/operator in a crowdfunding project will retain the majority of the equity.