Is Active or Passive Real Estate Investing Right For You?

Published On: March 21, 2023Categories: Insights

Real estate is a popular investment option due to its ability to diversify and strengthen an investment portfolio. It can provide investors with a desirable total return, tax benefits, and the chance to invest in physical assets. There are two main ways to invest in real estate: actively or passively. Both involve different levels of risk and require varying degrees of investor involvement, knowledge, and capital. 

Let’s take a closer look at both options. 

Active Real Estate Investing

Active real estate investing is best suited for experienced real estate investors as it involves taking a hands-on approach to the entire process of purchasing and managing a property. This type of investing requires a great deal of time and effort, but it can also be highly rewarding for those who are willing to put in the work. 

What’s involved in active real estate investing:  

Higher risk involved:

Investing in property can be a great way to diversify your portfolio and potentially increase your returns, but it’s important to understand that you’re taking on higher risk than other investment options. Before investing, it’s essential to conduct an extensive due diligence process to evaluate the current condition of the property and ascertain the immediate and future capital expenditure requirements. Additionally, as a sole investor, you may be limited to the number of properties you can purchase on your own which can limit your ability to diversify and spread the risk across a portfolio. 

Limited property types:

Active investors must identify properties within their general price range, perform in-depth physical inspections, collect competitive market rent data and satisfy any legal requirements. Using their own financing means they need to come up with large amounts of collateral and can be limited as to the types of property they can purchase, such as small-scale properties or single-family homes, preventing them from investing in larger properties with more attractive returns like apartment buildings. 

Securing financing:

Finding the necessary capital could mean dipping into personal savings or using your home as collateral. Active investors are also responsible for securing a mortgage. Finding appropriate financing can be a time-consuming process given the nature of the information lenders require, especially for loans on commercial or larger properties. The mortgage interest rates and terms available to you will also be subject to the going rates at the time. This can significantly cut into your profits, especially during times of high interest rates. 

Large time commitment:

By getting into the real estate business as an active investor, whether you invest in residential or commercial real estate, you become a landlord. This is a huge endeavour as property management, finding tenants, building maintenance and legal compliance are all your responsibility. Landlords who don’t want a side job might hand over the work to a property manager, but in doing so will increase their operating costs resulting in diminished net rental income. 

Though a considerable time commitment with higher risk, as an active real estate investor, all the rental income and capital appreciation from the property are yours. There’s no doubt that owning rental property can be advantageous both financially and personally if you have the capital, time and expertise to dedicate to it.   

Passive Real Estate Investing

Passive real estate investing is a great way to get involved in the real estate market without taking on the responsibilities of active ownership. It’s perfect for those who don’t have the time, expertise, or capital to purchase and manage a property themselves. You provide the investable capital and a third party takes on the active role on your behalf. This third party could be a property manager or a real estate investment fund (REIT).  

The benefits of passive real estate investing are numerous. You still get the advantages of actual ownership, such as potential appreciation and rental income, but without the associated obligations and risks.  With passive real estate investing, you can benefit financially from real estate without doing any of the hard work yourself. 

What’s involved in passive real estate investing: 

Lower overall risk:

You are exposed to much less risk as a passive investor. Since all aspects of the investment process are managed by experienced real estate professionals, it’s more likely that profits will be maximized, while the risks of making financial errors in overpaying or underpricing rental prices will be minimized. Being part of a pooled real estate fund, like Equiton’s private real estate investments, that owns numerous properties means your real estate portfolio is diversified, significantly helping to reduce the associated risk. 

Access to a wider range of properties:

By pooling your capital with other investors, you’ll have access to more institutional-grade properties, which can translate into higher returns when compared to the significantly smaller property types that most active investors can purchase on their own. 

No need to find properties:

With passive investing, you are plugging into a proven acquisition process run by an experienced team of real estate professionals who locate and analyze hundreds of deals to uncover the properties with the best price and with the best potential for returns. Even in times of high interest rates, institutional buyers are able to negotiate the lowest possible interest rates for long-term mortgages, while mitigating refinancing risk by carefully managing the portfolio’s average term to maturity as well as staggering the maturity dates. 

Little effort involved:

Unlike with active investing, once you find the investment that matches your financial objectives, all you need to do is invest your capital and let the professionals do the work for you.  

Which method is best?

It’s important to understand what’s involved with active and passive investing to determine which strategy best suits your financial goals and lifestyle. For some, actively participating in their investments is important to them, while others prefer to let seasoned real estate professionals do the work.  

If you’re looking for an easy way to get involved in the real estate market without taking on the responsibilities of active ownership, then passive real estate investing may be right for you. Once passive investors choose the right investment for them, all that’s left to do is await their monthly distribution or to reinvest them to reap the benefits of compound investing. To grow your wealth even faster, when you choose to reinvest your distributions with Equiton, you’ll automatically get 2% bonus trust units monthly.  

Benefit from real estate without the headaches. Equiton makes real estate investing easy and accessible. Contact us today!