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Is It Better to Be an Active or Passive Real Estate Investor?

Is It Better to Be an Active or Passive Real Estate Investor?

What are the pros and cons of passive or active real estate investing? Here is a highlight of what they are:

In terms of pros and cons for both investing types, any aspects revolve around control and time. 

Today we will start by talking about active investing first

One of the benefits of active investing is the great amount of control that you have. Since you own the property, you can make all of the significant decisions: the scope of the renovation, particular colors, and designs, whether to hold on to it or sell it, how to take advantage of tax benefits, and so forth. 

These are all decisions you have to make when you own the property yourself. Some people love to have this control, which is essential to them. On the other hand, it takes considerable time to take good care of the property and strategize the best way to run it to optimize the property’s return. 

You may not have the requisite experience to make the most of this investment. So, the burden of knowledge rests entirely on your shoulders. You might be a little bit more exposed to liability than when you are a passive investor, so it’s critical to ensure you have good asset protection in place and lawyers on your side. Make sure you have an appropriate structure and insurance to help minimize this risk. 

Now, let’s switch gears and talk about passive real estate investing.

One of the incredible benefits of passive real estate investing is the time involved. When you’re an active investor, you’re deeply involved in operating the investment property from day to day, especially in the beginning. Once you hire a property management company, and the property starts performing well, you’re probably paying less attention to it.

When you’re a passive investor, pretty much all the work is done for you. Learning how to vet and determine who to invest with takes quite some time and experience as well. Once you’re in these investments with a reliable sponsor, you’re effectively on the ride for the life of the investment. Once you decide to invest, all the decisions are taken care of on your behalf, and thus there’s no more significant time commitment expected from you. 

You just sit back and enjoy cash distribution. That said, your time is freed up to enjoy what you’d like to do with it. However, the caveat is that this benefit can turn against you due to a lack of control. So, if you perceive the control to be an important factor in your investment, this could be a downside. You don’t have full latitude in how you want to do with the investment. For example, you may not exit your investment earlier than stipulated in the offering memorandum. In that case, you’re pretty much locked in and liquidity ㅡ how quickly you can convert into cash ㅡ is not in your favor.

However long it takes, you need to sit and remain patient during the investment life. It’s also common that you’re going to face a little bit more in the way of fees. That’s because you have somebody else managing the investment for you. 

All in all, there’s no right or wrong type of investing, but rather it’s all about personal preference and investment philosophy. Therefore, it’s important to find the optimal balance between the amounts of time and control that you desire to see through your investments. 

If you have any questions or would like to learn more, please feel free to shoot us an email at Adam@Levinecapital.com or Tei@Levinecapital.com. Also, you can visit us at LevineCapital.com.