When most people think of investing in real estate they think of active investing.
Actively investing in real estate means that you (or a team that you manage) are engaged in the day-to-day activities of acquiring and managing investment properties.
While that is a great way to invest in real estate there is another way though – passively investing.
Here’s a brief breakdown comparing the pros and cons of active and passive investing:
Active Investing
Pros:
- Potentially higher returns: Depending on how you structure the deal your ROI will likely be higher than typical passive real estate opportunities
- Control: You have greater management control
- Leverage: You can use other people’s money (OPM) to limit your personal cash exposure
Cons:
- Time: You are responsible for operations and management
- Risk: As the managing owner you likely have higher liability risk
- Talent: Investing and running a business requires certain skills that have to be constantly improved
Passive Investing
Pros:
- Time: You are not responsible for day to day management
- Risk: Your risk is typically limited to the amount you invested
- Talent: You can invest with more experienced and skilled active investors
Cons:
- Control: You have limited to no control in management decisions
- Leverage: For the most part you are limited to your personal liquidity
- Lower returns: Your overall returns will likely be lower than active investors
Which option makes the most sense for you and your investment goals?