Active and passive real estate investments each offer opportunities for income generation, but come with different strategies, work requirements, and risks that may make one or the other a better fit for you and your family.
Active real estate investment techniques include fix-and-flip houses or owning single-family rental homes, among others. In this article, we will define passive real estate investment as opportunities in which you would pool money with other investors, to be managed by professionals, with profits split among stakeholders. At CREI Partners, we focus on facilitating passive investment into commercial multifamily property syndications, so we will be discussing that technique here.
There are three main factors that differentiate active and passive real estate investing. The time required to manage the investments are dramatically different. Each offers different levels of risk. And, of course, each offers a different set of rewards, as well.
How much time will the investment require to manage?
With active real estate investment, whether rehabilitating older homes to sell or renting out homes, there can be a heavy workload required. Managing contractors or doing the repair work yourself requires time invested to bring the home up to date. Once that process is completed, more time will be required to list the availability of the home, discuss the property with applicants, and complete all the paperwork. If you’re renting out the home, there are ongoing requirements such as managing repairs after damages or natural disasters, communicating with tenants, and starting the process again once the family moves on. Even if you’re using a property management company, these areas will need time and attention-sometimes on an emergency basis. This can add up to a full-time job on its own, on top of your already busy career.
Passive investment into commercial multifamily real estate syndications, on the other hand, has a much lower time commitment. There may be some time needed at the beginning to research, network, and complete paperwork, however, on an ongoing basis this option is more “set it and forget it.” Professional asset and property management are in place to take care of the renovation and day-to-day needs of the property, so you can get on with your busy life. The cash flow generated will arrive on a schedule, and then the property will be sold after 5-7 years generating an even higher return on investment.
Exactly how much is at risk?
All of us know that common story. Someone buys an investment home to flip or rent, but when they get into the property after closing, much more is wrong with the home’s systems than anticipated. The buyer ends up throwing money at the problem, hand over fist, but as soon as one problem is taken care of, another pops up.
Investing on your own in single-family homes or small multifamily properties can end up having a much higher cost than anticipated. Along with the cost of these repairs also comes lost income, which the investor had hoped to be generating much sooner in the process. Finally, heaven forbid the property ends up with tenants that need eviction or have caused thousands of dollars in damages to the property. Bottom line-much more is at risk in terms of both money and peace of mind than the initial investment.
With passive investment into real estate syndications, your risk is limited to the amount of the initial investment. Even if the deal goes belly up, there is never risk to your personal assets or your family home. Because these syndications are professionally vetted and managed, they end up being a much more secure option for increasing wealth than the average active real estate investment.
What does the investor stand to gain?
With active real estate investment, the home may be rented out or sold to generate income, after investment into renovation and bringing it up to date. Rents received can be used to pay the mortgage on the home or be used for other investments, but only after holding funds in reserve for emergencies. If the home is sold outright, there are immediately more funds to invest in another deal or to take as profit. All of this is after immense amounts of time and work have gone into the investment along the way. As so frequently happens with investing-the riskier the deal, the more one may (or may not) gain in the end.
Passive real estate investment syndications offer a less hair-raising ride. At the beginning of the process, there is some time and energy invested alongside the money but, after that, professionals take over the day-to-day management. You get to continue with your merry life-not being distracted from your family or your career to managing the asset. Cashflow checks start arriving in your mailbox, and after the holding period, your original investment along with profits are deposited into your account. Because there is a plan from the beginning on how to update the property to maximize its value, and professional management, the investment itself is more secure than most active real estate options.
It is easy to see that active and passive real estate investments offer much different experiences. If the thought of handling renovations yourself, building relationships with tenants, and increasing income with sweat equity are appealing, active options may fit you better. If, however, you have a busy family and career that you want to prioritize while investing in opportunities that offer a more secure path to wealth building, passive real estate investment with us may be the answer.