Ten Factors To Consider Before Investing In An Active Real Estate Deal

by | Jun 11, 2022 | Investing Advice | 0 comments

Would-be investors oftentimes think buying and managing multiple properties is the best way to secure their financial future. It seems easy enough. Purchase properties, find tenants, and collect monthly rent. 

But the constant stress of overseeing multiple properties can quickly dominate your time, attention, and life. Most people would agree, that the best investment is the one that fits in with your lifestyle, while reliably bringing in extra money.

We tried different avenues of real estate investing before eventaully discovering we could invest passively in real estate syndications. As a passive investor, you never have to deal with the headaches being a landlord. You get to avoid tenants, toilets and termites. 

If you’re currently investing actively in real estate or if you’re just getting started in as an investor, keep reading to learn how real estate syndications might work for you.

In this article, you’ll see what passive real estate investing means and find out whether you should be an active or passive investor.

 

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.

Even with a professional property management team on board, you as the landlord still have an active role in the investment.

The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

 

What It Means To Be A Passive Investor

On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.

The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.

However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.

 

Should You Be an Active or Passive Real Estate Investor?

Here are 10 factors to help you decide which path is right for you.

 

#1 – Tenants, Termites, Toilets and Calls at 3AM

If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role.

Some people thrive on being a nuts-and-bolts type of overseer and relish working a career while fielding 3AM phone calls about broken water heaters and noisy neighbors.

However, if you find you have enough work and you don’t want to take on any extra hassle, you should go the passive route. 

 

#2 – Time

Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.

On paper, active real estate investments seem workable. Unfortunately, that all changes once you get into the daily grind and problems start popping up, needing your attention to solve them. 

As doctors we know firsthand what it means to be on-call, imagine being on-call while trying to generate passive income! 

Real estate syndications offer you time freedom as well as financial freedom.

 

#3 – Involvement

How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? 

If so, you should pursue rental properties and active investments.

On the other hand, if you want to sit back while someone else does all of the daily work, passive investing would likely be a better fit for your lifestyle.

 

#4 – Profits

With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors. 

This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.

 

#5 – Expenses

Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times. Active real estate investors also rely solely on their own funds.

Passive investors only make an initial capital investment. The sponsor team handles the budget and any unexpected expenses. 

 

#6 – Risk and Liability

With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets. 

With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.

 

#7 – Paperwork

Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.

With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. You won’t need to fill out lender paperwork, file for insurance, or do any bookkeeping.

 

#8 – Team

As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.

As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.

You’ll never have to worry about finding new team members. Your sponsors handle all of the personnel issues without any expectations from you.

#9 – Diversification

With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.

With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.

 

#10 – Taxes

As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.

As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. 

You won’t need to track income and expenses throughout the year. 

 

Passive Investments are Great for Busy Professionals

Real estate syndications offer the benefits of real estate investing without the hassle of being a landlord. 

If you crave being in control of the ins-and-outs of your real estate investments, and love the idea of working with the public on your days/nights off, active investing just might be the perfect adventure for you. 

However, if you’re looking for less work and more income, passive investing is the path to take.

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