Are you aware of the fact that you could invest in real estate without encountering any of the hassles associated with owning a home or multifamily property? Without even needing to meet with property managers or brokers?

A lot of people do not know that passive real estate investing offers this kind of freedom and flexibility. In this article, you’ll gain a complete understanding of what being a passive real estate investor entails and how to reach a decision on whether you should be an active or passive investor in real estate.

Being an Active Investor
As an active investor in real estate, you choose to be completely hands-on. You want to paint your walls, fix all the fittings, lay your tiles, and generally wade neck-deep in everything related to the repair and maintenance of your home. Further, you want to be involved in the selection of your tenants.

Most times, even with the hiring of property managers, active investors still want to be on top of lease renewals, decisions on turnovers and maintenance, and so on. Active investors are real DIYers.

A Passive Investor
Passive real estate investments simply involves you contributing a check to invest alongside other investors while a team of professionals take over the day-to-day operations, sending you dividends quarterly.

These kinds of investments are known as set it and forget it investments where you leave the running of the real estate property in the hands of others rather than playing an active role in its maintenance and administration. The trade-off is that the returns are lower here, but you do get greater freedom to engage in other things.

Decision to Be an Active or Passive Real Estate Investor
There’s a fair chance that you’re still undecided whether investing passively is for you. Maybe you’ve always wanted to be a landlord. Perhaps you want to try out flipping a property or you’re still in the process of gathering details on how to get started in real estate investing.

Normally, you want to cover all angles before deciding on your next move. We also appreciate that deciding how best to invest your money can be nail-biting at times, due to the reduced margin for error. You should consider these ten things when trying to decide each a decision whether to be an active or passive real estate investor.

#1- Tenants, Termites, and Toilets
Do these three words set your heart racing in excitement or make you squirm uncomfortably? That’s probably the first thing to consider when making a decision. If you’re excited at the prospect of becoming a landlord and you’re not put off by all the hard work it entails, particularly the less glamorous aspects of it, then it appears that you’re practically cut out for a more active role in your Investment.

On the other hand, if the thoughts of doing these things send a shiver down your spine, maybe you should let others handle these tasks and become a passive investor.

#2- Time
Do you have enough spare time to devote to the maintenance of your real estate investments? You’ll have to be more involved as an active real estate investor and this will take up a significant portion of your time, both during the initial acquisition as well as throughout the project. The case is different with passive investments. You’ll have to do research and vetting at the earliest stage, but when you invest, you don’t have to put in any additional time.

#3- Involvement
If you’re an active real estate investor, you have to be very hands-on and play more than a participatory role in the maintenance and design of your property. You will have to be involved in every decision about the property, from design to renovations. Passive real estate investors are happy to let someone else handle these tasks on their behalf.

#4- Profits
Active real estate investors put in the most time and effort and walk the hard yards so naturally, they are rewarded with the largest chunk of the profits. As a passive real estate investor, you would have to share the profits with others.

Nevertheless, don’t forget that the fact that you’re sharing profits does necessarily entail that your return on investment will be lower than if you were to invest actively. It depends on several factors including the market, individual deals, loan terms, and other aspects.

#5- Expenses
You will need to consider ongoing, upcoming, and unforeseen expenses and adequately plan for them as an active real estate investor. Even though you save a certain amount of money each month for capital reserves and emergencies, you may need to inject more money into the investment or deal with insurance claims in the event of emergencies.

As a passive real estate investor, your original investment is the only capital you’ll need to put in throughout the project, in the majority of cases. If unforeseen circumstances arise which are not able to be covered by the capital reserves or some other buffer, returns may be lower for a while, but you’ll very rarely need to invest additional capital.

#6- Risk And Liability
When tenants are happy and your property is doing well, all is going swimmingly. However, are you covered in case things suddenly take a turn for the worse?

Depending on how you structure it, your tenants can hold you personally liable and come after your other assets if things go awry in an active real estate investment. That’s why it’s necessary to take steps to insure yourself and your assets against liability.

Your liability is limited with a passive real estate investment because you’re investing in an LLC and LP that holds the asset. Your stake in it is limited to the amount you invest. If things suddenly go south, the worst that could happen is that you’ll lose your original investment. All your other assets would not be threatened.

#7- Paperwork
You should be prepared for a mountain of paperwork as an active real estate investor, both during the acquisition of the property and through other aspects such as reports, bookkeeping, and all legal documents needed throughout the project. As a passive investor, you’re only required to sign a document upfront then receive monthly email updates, quarterly financial reports, and an annual K-1.

#8- Team
You typically get to put together your team as an active real estate investor. You decide on a broker, property manager, and all the contractors that you’ll be working with.

As a passive real estate investor, you’ll be investing in a team that has already been put together. The broker and property managers would already have been identified by the deal sponsor team, so you’re going to be taking advantage of and exploiting their expertise.

#9- Diversification
Passive investing doesn’t take up much of your time and you’re not required to be actively involved, therefore you can invest your money into other assets. Those assets do not also have to be local as you are exploiting the expertise of teams on the ground in each target market. This is one key advantage of passive investing over active investing.

If you’re an active investor, you’re obliged to be an expert in whatever asset class and market you’re investing in which is likely to take up a lot of time and effort, greatly diminishing your ability to diversify into multiple markets. 

#10- Impact
As a passive real estate investor, you’re able to invest in more and bigger projects, your money reaches further and can impact a greater number of people. However, you have limited direct contact with tenants. As an active real estate investor, your sphere of influence is more immediate, therefore, you can have a closer relationship with your tenants.

The great news is that there are options in the middle of this dichotomy if you’re still not completely sure whether you’re a passive real estate investor or an active real estate investor. If you’re looking for a middle ground, check out turnkey rentals and buy-and-holds.

Conclusion
If you’re looking for a wonderful way to create long term equity, create a lasting impact on people and the society at large, investing in real estate is a great way to go about achieving these. It’s up to you to decide, after considering your unique circumstances and preferences, whether you’re a passive or active real estate investor. You may even consider trying out both ends of the spectrum to make utmost use of opportunities.