A lot of people are trying their luck with different investments in this day and age. They are starting to realize that living from paycheck to paycheck isn’t really a valid option if you want any form of financial security in the future. So, they use whatever money they have and try to generate a secondary income. Some invest in the stock market. Others try starting small businesses.
It is the real estate market, though, that often proves to be the best investment. It is much less volatile than stocks, and it usually yields high profits if you know what you’re doing. Before you can get into that world, you need to understand the difference between passive and active investment strategies in real estate.
Passive investing
Passive investing strategies in real estate are exactly what the name implies. This is when you, the investor, put your money into a real estate syndication where someone else manages the entire process. You basically give your money to real estate experts, and they use it in the market to generate profit for you. It is a hands-off approach that has its fair share of pros and cons.
Pros
Less involvement
With passive investment, you are significantly less involved with the entire process. You outsource the process of selecting and managing properties to experts, who use the other investors’ funds to purchase a portfolio of properties and execute business plans that would yield profit for all parties involved. So, this strategy is ideal for a person who wants to get into real estate but doesn’t have the time needed or the experience.
More predictable
Another perk of passive real estate investing is the fact that it is more predictable, and in turn, entails fewer risks. This makes them more suited for short-term goals because you can form a clear idea of just how much money you stand to make. It is all about using the right strategy for you if you want to get into real estate, and that entails having goals –– whether that is in the long run or for the near future. If, for instance, you want to buy a new car, then perhaps this particular strategy is more suited for your short-term goals.
Cons
Not as rewarding
It only makes sense that the returns are lower here. You don’t take as much risk as the active investing, and as a result, you don’t stand to make as much money. For the most part, passive real estate returns are under 10%, which is much less than what you stand to make if you went the other way.
No control
When you are a passive investor in real estate, you are basically a silent partner in the deal. You don’t have much say in what properties are being purchased, or where, and what the business plan for those properties is. This means you have to put all your trust in the experts handling the deal, which is not always ideal.
Active investing
Active investing is pretty different from its counterpart. Here, you manage everything. It is up to you to find the property, negotiate its price, and finalize the purchase. You would also be the one responsible for managing it and collecting the money if you plan on renting it, as well as fixing and selling it if you want to flip the property. You are simply involved in all aspects of the investment.
Pros
More control
This type of investment is more suited for an investor who wants to have more control over their money. As mentioned earlier, you do everything here. This means you can choose which properties to purchase, and where, as well as the business plan for said properties.
Higher returns
Since the risks are greater here, the returns are much higher. You stand to make a lot more money with active rather than passive investment. If you purchase the right property in a good location, renovate it, and then sell it, you can make a huge profit. The same applies to rentals, which can be pretty financially rewarding.
Cons
Higher risks
Active investment in real estate is riskier than its counterpart. If you make the wrong move here –– getting a property at a poor location, for example –– you can lose a lot of money. The risk here is also in the fact that you might need a loan to make an active investment in real estate, which is a whole problem on its own.
Active investment is also more time-consuming, which means you have to dedicate your full attention to it if you want to make money. At the end of the day, there are several factors to consider, because each option has its pros and cons, and it is up to you to decide which strategy works best for you.
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February 20th, 2020 by financetwitter
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Great article on investment strategies.
Thanks for sharing.