If you’ve landed on this article, you’ve likely heard the terms “active investor” and “passive investor” thrown around in real estate conversations.
They’re essential terms with significant differences, so it’s a good thing you decided to look up the difference.
As an investor in commercial real estate, you have the opportunity to be both an active investor and a passive investor. You can also choose to be one or the other.
That may sound confusing, but let’s get into the real estate investing definitions of each so that it all starts to make more sense.
What is an Active Investor?
When a person, company, or fund is directly involved in the investment process, they are considered an active real estate investor.
Active real estate investors need to contribute time, money, strategy, effort, and risk. An active investor (or a group of active investors) is hands-on in acquiring, renovating, managing, and/or selling the investment property. All of this is a lot of work, and the degree of dedication required by active real estate investors is sometimes equivalent to full-time employment. There are too many dangers, intricacies, legal, and financial risks that confront the commercial real estate investor not to be a specialist in their sector and market.
All of this work is not for nothing, though!
Active investing allows the investor to select properties depending on their preferences, criteria, location, and budget. Active investors also receive more control over the property and—in many cases—more money from the deal than passive investors.
The disadvantage of active investment is the headache element. Active investors handle disgruntled renters, plumbing leaks, routine maintenance, rental marketing, etc. Even for the smallest properties, active investing necessitates a sizable investment.
What is a Passive Investor?
As the name implies, a passive real estate investor invests in real estate passively to produce passive income through real estate.
There are several methods to invest in real estate passively.
You may put your money into a real estate investment trust (REIT), similar to a mutual fund. By investing in a REIT, you’re purchasing equity in a real estate portfolio that the REIT actively manages by investing in a REIT. REITs are obligated to repay 90 percent of their income to shareholders. You may purchase and sell shares, making it a much more liquid position than acquiring traditional real estate.
Another option is to invest in real estate passively is through a process known as syndication.
If you’ve ever bought an airplane ticket, you participated in a syndication. You, like others, paid for your seat. The income collected by ticket sales pays the airline, pilot, government fees, and other costs associated with operating the flight.
Real estate syndication is comparable.
In essence, you invest alongside other investors. Each investment property (or “deal”) may have a minimum investment requirement, such as $20,000 or $75,000 per person. Like an airline ticket, the investment amount covers essential costs for acquiring, operating, and selling the investment property. All investors partake in the risk and return of the property, and each investor receives a portion of the earnings.
The benefits of being a passive investor are primarily in the “hands-off” component. As a passive investor, you’re not responsible for managing tenants, dealing with building repairs, or any of the “headaches” that come with being an active investor. You effectively get to invest your money and enjoy the returns and tax benefits of investing in real estate.