Most people think that being a real estate investor means being a landlord, which means you would have to take care of the day-to-day processes of owning a property investment. People assume more properties equals more work and responsibility, but this is far from what I’ve found investing in real estate syndications (passive real estate investments).
It is possible to build and sustain wealth while enjoying tax benefits when investing passively in real estate.
Keep reading to learn all the benefits of passive investing in real estate compared to getting involved as an active investor.
What It Means To Be An Active Investor
When most people think of real estate investing, they think of rental property investing. When you invest in rentals, you have to buy a single-family home, find a renter, and collect monthly rental income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an active role in the investment.
The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
What It Means To Be A Passive Investor
Alternatively, you have passive investing, which is the “set it and forget it” type of real estate investment. You invest your money, and someone else deals with the daily duties of the landlord.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
In your real estate ventures, you need to decide if you want the passive or active path.
Should You Be an Active or Passive Real Estate Investor?
Consider the following ten factors to help you decide if you want to be an active or passive investor.
#1 – Dealing with the day-to-day Processes
If you would love having tenants and making improvements, then consider an active investor role. The active investor isn’t motivated only by money but loves ongoing interactions with other people.
If you want years of personal involvement with tenants, legal departments, your local zoning board, and more, active investing is your path.
On the other hand, if you have no interest in adding “landlord” to your resume or lifestyle, you should go the passive route.
#2 – Time Commitment
Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle. In fact, active real estate investments could require more of your time than your primary job. If you are looking for more challenges and work in your life, consider active investing.
However, passive investments only require your time up front, during the research phase. After you’ve entered a passive real estate deal, your time is yours; meaning you go about your normal daily activities such as your job, travel, spending time with family, etc.
If you prefer to focus on living overworking, passive real estate investing fits your goals
#3 – Involvement
The third factor to consider when choosing between passive and active investing is involvement.
How hands-on do you want to be?
- Do you want to manage the property yourself, field tenant requests, and schedule maintenance/repair appointments?
- Do you want to sit back while someone else does all the day-to-day necessities of owning property?
If you want to do the work and be actively engaged in the daily processes then active investments are for you.
If you aren’t interested in being involved in the daily minute details of real estate, passive investments are the way to go.
#4 – Profits
With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.
However, with active investing, you would also be responsible for all the upkeep of a property, so your net profits might be slim. The group investments in a passive deal defray those costs and often yield consistent income without the extra work.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
#5 – Expenses
Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times. Also, active investors aren’t paid for any extra time they spend on a project.
Passive investors only make an initial capital investment, and they aren’t expected to input any extra work or money into the project after that first investment.
This consistency in passive investing will allow you to plan your finances. Active investments require initial investments plus a plethora of unexpected expenses through the life cycle of your project, making planning difficult.
#6 – Risk and Liability
With active investing, if something goes wrong, you are personally held liable, which means you may lose not just the property but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.
#7 – Paperwork
Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.
With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. You won’t need to fill out lender paperwork, file for insurance, or do any bookkeeping.
The time saved in paperwork alone is worth the initial investment for those who hate dealing with paperwork and other forms of red tape.
#8 – Team
As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors. To do that well, you’ll need to be familiar with those jobs and how to choose the team wisely. You’ll also have to deal with the hiring, firing, and oversight of all those people.
As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.
Once again, passive investing saves you time and energy and gives you the freedom you desire on an investment.
#9 – Diversification
With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.
With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.
Although you would need to be familiar with the markets you choose, your passive investment team will guide you to markets that are emerging and point out any problems with markets you’re considering.
#10 – Taxes
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. You will not have to track income and expenses throughout the year, since it is already done for you.
Passive investing allows you a measure of safety when it comes to dealing with the ever-changing world of tax laws.
Passive investing provides time and financial freedom
If you’re ready to be hands-on in the various aspects of being a landlord, you should pursue active investments.
However, if your time is limited but you have the capital to invest, you’ll find long-term stability as a passive partner in large multifamily properties.
Passive investing allows you to remain in control of your time while growing your wealth and enjoying tax benefits. Part ownership in multifamily real estate assets allows you to leverage my experience easily and embrace stability in your portfolio.