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Active vs Passive Real Estate Investing: 10 Factors to Consider

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As the real estate market starts to even out after the pandemic, you might be considering whether or not now is the time to enter the commercial real estate market. Or perhaps change how you are currently investing.

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In this article, we will go over ten factors you should consider when deciding between active vs. passive real estate investment and how these investment styles can result in different outcomes.

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What is Passive Real Estate Investing?

Passive real estate investment is as the name suggests, a passive approach to investing in commercial real estate. Investors here will purchase properties and rent them out, with less day-to-day interest or involvement in the property itself.

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You might consider passive real estate investments if you want to own the place but do not have to worry about its upkeep.

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These properties are typically managed by external property managers so that everything can keep running smoothly. This way tenants get the support they need and passive real estate investors are less involved.

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In order to make up for the difference, passive real estate investments hinge on as little effort from the investor as possible for the maintenance.

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What is Active Real Estate Investing?

On the other hand, active property investing is much more involved in putting money into real estate. The owner here is much more of a, you guessed it, active participant!

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Landlords who own their properties are a great example of active real estate investors as they manage it and collect the monthly rent.

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Active real estate investment also includes the development of buildings and renovation. This work can be extremely beneficial to your commercial real estate property and will likely increase the value, however, this work is also time and capital-intensive.

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If this work is necessary it would likely be outsourced in order to allow for less involvement with the actual property work itself.

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How Do You Choose Between the Two Options?

Keep in mind that one sort of investment is not better than the other, and we want to offer a brief guide on the two investment styles. Both can be profitable, but it is up to you to determine which is most fitting to your lifestyle.

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In this section, we will go over the ten factors that will hopefully help you decide which type of real estate investor you want to be – passive or active.

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#1 – Tenants, Termites, and Toilets

The first thing you should consider is whether the words above – tenants, termites, and toilets – excite you or terrify you. If you’ve always wanted to become a landlord, and the thought of screening tenants, marketing your own property, collecting rent, and rolling up your sleeves to improve property are things that thrill you, then perhaps you should consider taking a more active role in your investments.

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If, on the other hand, you don’t want to touch any of those with a ten-foot pole, then perhaps you should take a backseat and become involved in passive real estate investments.

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#2 – Time

How much time do you have to devote toward your real estate investments? Actively managing investment property requires substantially more time, both during the initial acquisition as well as throughout the lifecycle of the project.

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With passive investing, on the other hand, you do some upfront research and vetting, but once you passively invest, you do not need to put in any additional time.

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#3 – Involvement

I used to love the hands-on nature of designing a kitchen rehab, picking out the finishes and patterns. I’m now at a point in my life when I’m happy for someone else to take the lead on those types of decisions.

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As an active real estate investor, you get to choose those designs, vet tenants, and make decisions on renovations and upgrades. As a passive real estate investor, you put your trust in someone else to do those things.

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Think of it like an airplane ride.

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The active investor is the pilot. The passive investors are passengers.

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Everyone on the plane is going to the same place, but their levels of control and involvement are very different.

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#4 – Profits

With active real estate investments, because you are putting in the lion’s share of the time and work, you are also rewarded with the lion’s share of the profits. Passive real estate investors share a pool of profits.

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However, keep in mind, that just because you are sharing profits with other real estate investors, that does not necessarily mean that your return on investment will be lower than if you were to invest actively. It all depends on each of your real estate deals, the market, loan terms, the business plan, and other aspects.

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#5 – Expenses

Active real estate investors need to plan for ongoing, upcoming, and unforeseen expenses that could or might occur at each rental property.

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If you’re actively investing, you might save some money each month for capital reserves and emergencies, but in the event that something bigger goes awry, you may need to put more money into the investment, and/or deal with insurance claims.

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In most cases, as a passive real estate investor, your original investment is the only capital you’ll need to put in for the life cycle of the project. As a limited partner passive investor, when unforeseen circumstances come up and are not covered by the capital reserves or other buffer, you may see lower returns for a while, but it’s rare that you would need to put in additional capital.

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#6 – Risk and Liability

Things are all well and good when tenants are happy, and your property is doing well. But what about when unexpected things pop up?

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With an active real estate investment, depending on how you structure it, you could be held personally liable, and your tenants could come after your other assets, so it’s important to take steps to protect yourself and your assets.

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Every investment opportunity comes with a certain level of risk. Active investors carry most of this risk (aside from that alleviated by insurance) for each rental property in their real estate portfolio.

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With a passive real estate investment, your liability is limited. You are investing in an LLC or LP that holds the asset, so your stake in it is limited to the amount you invest. If all hell breaks loose on the property, the worst-case scenario would be that you would lose your original investment; your other assets would not be in jeopardy.

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#7 – Paperwork

As an active real estate investor, you should be prepared for a lot of paperwork, both during the investment process as well as through the bookkeeping, reports, and legal documents needed throughout the life cycle of the project.

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As a passive real estate investor, you sign one document up front, then receive monthly email updates, quarterly financial reports, and an annual K-1. Passive real estate investing creates less work on all fronts of the real estate investing business.

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#8 – Team

As an active real estate investor, you typically put together your own team. You choose the broker, property manager, and contractors you want to work with.

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As a passive real estate investor, you invest in a team that’s already put together. The deal sponsor team will have already identified the broker and property managers they want to work with, so you leverage their shared expertise.

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#9 – Diversification

This is one area where I think being a passive investor really gives you the upper hand. Because passive investing doesn’t take as much of your time, nor do you need to be hands-on, you can invest your money into more assets. Furthermore, those assets don’t have to be local, as you are leveraging the expertise of teams on the ground in each target market.

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As an active investor, you must be an expert in whatever asset class and market you’re investing in, which takes time and energy, so your ability to diversify into multiple markets and multiple asset types will be limited. Passive real estate investing, on the flip side, can provide almost unlimited opportunities for diversification.

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#10 – Impact

On the impact front, you should consider whether you want to have a broad or deep impact.

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As a passive real estate investor, because you are able to invest in more assets and bigger projects, your money goes farther and has the potential to impact more people, families, and communities. However, your direct contact with those tenants is limited.

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As an active real estate investor, you can have a deeper relationship with your tenants, if that’s what you desire. We have good friends to this day who started out as tenants in our rental properties.

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The Real Estate Investing Spectrum

The good news is, if you’re not 100% sure whether you want to invest passively or actively, there are options in the middle as well.

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If you’re ready to roll up your sleeves and manage your own fix-and-flip like an HGTV pro, you’re likely on the active end of the real estate investment spectrum. If you’re strapped for time and just want to put your money into an investment with stronger and more reliable performance than the stock market, you’re likely on the passive end of the spectrum.

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But if you’re thinking that you might be in the middle, look into turnkey rentals and buy-and-holds, as they may give you some of that control and passive income without a huge time investment.

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Should You Be an Active or Passive Investor? Take the Quiz!

If you’re on the fence, check out the quiz below to find out where on the spectrum you land. You can download a PDF version of the quiz here.

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Investing in real estate is a great way to build passive income, create long-term equity, qualify for tax benefits, and have an impact on people and communities. Whether you invest passively or actively is up to you and your unique situation, goals, and interests.

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Either way, there are investment opportunities aplenty out there for you, so you may want to try both ends of the spectrum.

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If you’re interested in learning about more passive real estate investment opportunities, consider signing up for the Wingate Capital Investor Club, and we’d be happy to share our latest offerings with you, so we can partner together to change the world, one investment at a time.

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Still Need Help Making Your Decision?

If you are still trying to decide between active vs passive real estate investing be assured that there is no wrong way to be a commercial real estate investor. Just understand that whichever option you choose, making an investment in commercial real estate is a sound use of your hard-earned money.  

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If you don’t mind doing the work yourself, active real estate investment might not be a bad option for you. But if putting in less of your time and not having to worry about managing it yourself sounds more appealing, then passive investment may be the better choice.

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So if you are still struggling to decide between the two styles, know that we are happy to help! Whether you are interested in hiring a commercial property manager or need more guidance before you start to invest, Wingate Capital is here to help!

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