Which Type of Investor Are You: Active or Passive?
When it comes to building wealth through real estate, investors have a choice to make: embrace the role of a passive investor or dive into the active realm. Both avenues offer enticing opportunities, but they cater to different personalities, levels of involvement, and investment strategies. In this post, we’ll explore the nuances that set passive and active real estate investors apart, shedding light on their distinct pros and cons.
The Pulse of Passive Investors
Picture this: you’re looking to grow your wealth without the day-to-day responsibilities of property management, property acquisition, dealing with lenders and everything else that comes along with being an active investor. Passive investors revel in this scenario, as they seek to secure a steady stream of income with minimal involvement. These individuals are the savvy observers, choosing to entrust their investments to experienced professionals while enjoying the fruits of their labor.
Pros of Passive Investing
- Time Freedom: Passive investors relish the luxury of time, as they’re not burdened by the endless tasks associated with property management and the operations of ongoing real estate business. Their investments generate income while they focus on other aspects of their lives, whether that be their professional careers or carving out more time for the finer things in life.
- Expertise Leverage: By partnering with seasoned real estate professionals, passive investors tap into a wealth of knowledge. These experts / active investors handle property acquisitions, tenant relations, maintenance, project financing, vendor relations, and so on; ensuring optimal returns.
- Diversification Made Easy: Passive investing allows for diversification across various properties, reducing risk by spreading investments across different markets and asset classes. In addition to property diversification, passive investors can spread their investment capital across a multitude of strategies and industries since they do not have to invest the time to become operational experts in each.
- Stress Reduction: The passive approach eliminates the stress of hands-on management, giving investors peace of mind and freeing them from the logistical complexities of property ownership. This is one of the more appealing aspects of passive real estate investing. Active investors that have turned to passive investing, can tell you that shedding the responsibilities of active investing provides a significant return on time often overlooked in investment return calculations.
Cons of Passive Investing
- Limited Control: While entrusting experts is a strength, it can also be a limitation. Passive investors have less say in day-to-day decisions, potentially missing out on certain opportunities. Active investing does require more mental space to take on day-to-day decisions. If you have this capacity to take on more, passive investing may leave you wanting more.
- Lower Returns: Since they’re outsourcing management responsibilities, passive investors might not realize the same returns as active investors who are directly involved in value-add strategies.
- Dependency on Management: The success of passive investors heavily relies on the management team’s performance. A subpar team could lead to underwhelming results. When researching investment options, have a close look at the management team and their track record.
The Dynamic World of Active Investors
On the flip side, active real estate investors are the driving force behind their ventures. They embrace the hands-on nature of property ownership, striving to create value and maximize returns through strategic decision-making, renovation projects, and market timing.
Pros of Active Investing
- Full Control: Active investors are the captains of their ships, making crucial decisions that directly impact their investments. They have the autonomy to implement value-add strategies, which can yield higher returns.
- Enhanced Returns: By directly participating in property improvements, active investors can unlock hidden value and increase rental income, leading to potentially higher returns.
- Skill Mastery: Active investing demands a deeper understanding of the real estate market, property management, and negotiation skills. This constant learning curve can be intellectually stimulating.
- Adaptability: Active investors can quickly respond to market shifts, adjusting their strategies to capitalize on emerging opportunities or navigate challenges.
Cons of Active Investing
- Time and Effort: Active investors commit significant time and energy to property management and business operations, which might limit their ability to pursue other interests or investments. Active investing should be run as a business to improve the chances of succeeding.
- Risk and Stress: The hands-on approach can be stressful, especially during market downturns or when dealing with property-related issues like vacancies and maintenance.
- Skill Requirement: Active investing demands a comprehensive skill set that includes market analysis, property valuation, negotiation, and project management. Lack of expertise can lead to costly mistakes. If you choose to pursue a career in actively operating a real estate investing business, seek the help of a coach, mentor and enroll yourself in an educational program specific to the strategy you are looking to execute on.
Finding the Balance: The Hybrid Approach
Recognizing that both paths have their merits, some investors opt for a hybrid approach. This approach allows investors to maintain some level of control while also benefiting from the expertise of a trusted management team. It strikes a balance between being hands-on and delegating tasks to professionals.
In some cases you may decide to be an active investor in one real estate investing strategy and a passive in another. The world is your oyster!
Ultimately, whether you choose the passive path, the active journey, or the hybrid blend, your decision should align with your investment goals, risk tolerance, and personal preferences. At Peak Multifamily, we understand that every investor is unique, and we’re here to guide you toward the strategy that suits you best. Whether you’re a passive observer seeking dependable income or an active enthusiast aiming to shape your investments personally, the world of real estate offers avenues to thrive. So, embark on your journey with clarity, and let your investment choices pave the way to financial prosperity.
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About the Author:
Mark Baltazar, CEO and Co-Founder of Peak Multifamily Investments
Mark began his real estate investing career in 2014 focusing on single-family rehabilitation projects and single-family rentals. He then shifted to commercial multifamily in 2017, growing a portfolio apartment buildings in Canada’s top rental markets.
The multifamily strategy executed to date has included the acquisition of underperforming apartment buildings, improving, and repositioning them to a stabilized operating business.
Prior to co-founding Peak Multifamily, Mark developed his extensive business experience spanning over 20 years, with 15 years as a partner in a management consulting firm where he lead business growth initiatives with clients that include some of the world’s largest consumer brands. In this role, Mark was responsible for the revenue growth of the firm and the delivery of strategic consulting services to help the firm’s clients achieve growth through new product innovation and strategic brand repositioning.
Mark’s 20+ years of strategic management experience and nearly 10 years of real estate investment experience has been an integral driver of the growth that Peak Multifamily Investments Ltd. has experienced to date and will continued growth into the future.