Active Investing
If you are an active investor, this means you are actively making decisions that will impact the performance of your investment.
For example, if you are investing in a single-family home, you must obtain financing, find a renter, pay the mortgage, pay the expenses, attend to any maintenance issues, and any other responsibilities related to being a landlord. Even if you are outsourcing to a property management company, you must still manage the property manager. You are making the decisions on what maintenance issues must be attended to and communicating how you would like to manage the property to the property manager.
In a multifamily real estate syndication, where a group of investors pool their resources together to purchase a multifamily apartment, the active investor/general partners are actively pursuing new deals, making offers, obtaining financing, working with attorneys to draft up legal documents, underwriting, conducting due diligence and property tours, establishing relationships with investors and other key partners, and managing the entire asset. Because of all the functions that are required in a real estate syndication, syndications are usually run as a team.
With active investing, you must constantly evaluate the current market trends, property situations, and must make quick, educated decisions that will directly impact the property’s performance.
Passive Investing
Passive investing means that you invest your money and receive distributions, with no active role and decision making regarding the operations throughout the entire investment period.
If you invest in a multifamily real estate syndication as a passive investor, the only thing that you are required to contribute is your monetary investment. The passive investor is hands-off and does not require any work related to being a landlord and the day to day operations, but still receives the benefits from the profits and the performance of the property. There will, however, be up front work required as you are conducting your own assessment on the investment and sponsorship team. When you invest passively in a syndication, you become a limited partner.
Syndications allow passive investors to participate in opportunities that they would otherwise be unable to purchase on their own, which is why syndications can also be considered as group investments.
Which is the right one for you?
Active Investing Advantages
The biggest advantage to being an active investor is control. You have more control of the overall outcome of the investment. You can decide when to exit a deal and the actions to take to impact the bottom line.
As an active investor, the overall returns may be higher, but they are willing to invest hours and hours of their time in exchange for achieving these potentially higher returns.
Also, active investors may benefit from some additional tax advantages.
Active Investing Disadvantages
One of the biggest disadvantages with being an active investor is the time required to actively acquire and to manage the investments. There is a lot of activity required while pursuing a new acquisition, followed by closing, and the operational requirements once the property is acquired. Additionally, it takes up a lot of time to build a strong team to support the success of the project.
Another disadvantage is the increased exposure to risks and liabilities, as well as the increase to your responsibilities. Active investors are liable for the loans, which increases their risk in the investment.
In real estate syndications, your fiduciary responsibility is to your investors, so it is important to send out communications regarding the performance of their investment.
Passive Investing Advantages
Minimal time is required. If you are a busy professional, have a family, or have a lifestyle where your time is limited, passive investing allows you to have your money working for you without having to invest a lot of your time. You have no obligations to participate in any landlord activities and day to day operations.
Passive investing also allows you to leverage off other more experienced people who are actively managing the investments.
As a passive investor, you have limited risk exposure. Your risk is typically limited to the amount of money you invest, thus, limited partner.
Passive Investing Disadvantages
The biggest disadvantage to passive investing is the lack of control. As a passive investor, you will need to be prepared to give up control to the active partners and trust in their capabilities and decision making. You may not know all the ins and outs of the current performance, but are able to rely on your sponsor to provide you with the latest updates. If this makes you uncomfortable, then passive investing may not be the right fit for you.
Another disadvantage is that the initial investment is typically illiquid until some type of capital event or exit. This means that you will not be able to pull your money out at will and must be prepared to be invested for the full lifecycle.
Conclusion
There are many advantages and disadvantages to investing either as an active or as a passive investor. It really depends on your own unique situation and what interests you the most. There is no one right or wrong answer and it varies from one person to another. For many of us, we will end up doing a combination of both active and passive investing.
With any investments, there will always be some level of risk involved. It’s important to determine your risk tolerance, available time, as well as your own current situation to decide whether you would like to be involved as an active or as a passive investor. While there may be greater potential upsides with being an active investor, there is a lot of time that must be invested as well in order to achieve those returns. The passive investor can minimize their time investment, but still enjoy the benefits of investing in real estate.
Ultimately, the choice is yours. Which one will you choose?
