If you are looking to invest in real estate, you have probably come across the terms passive investing and active investing. These are two different ways to approach your money and make it grow, but what is the difference and what are their pros and cons? This article may have the answer for you. So hold your horses and read on before you finally purchase that condo unit or house and lot for sale.
What is Passive Real Estate Investing?
Passive real estate investing is a way to invest in real estate without having to actively manage the property. The premise is that passive real estate investors can use their portfolio of investments to make money on the appreciation of their properties, but they do not have to go out and look for deals or manage the day-to-day details. Instead, they will just hold onto the investments and let them do their thing until they are ready for sale. Moreover, in passive real estate investing, the investor pays a fee for the services of an advisor or manager who does the work for them. With this, they do not have to worry about tasks like researching companies or drafting a prospectus for their investment portfolio.
Passive investing is particularly attractive to investors who are interested in long-term growth and wealth creation but cannot be bothered by the time it takes to research and manage their investments. This type of investing is also useful for those who want to diversify their portfolio, but do not want to deal with the hassle of buying individual stocks or bonds. However, just like any other technique, passive real estate investments have their pros and cons.
Pros of Passive Real Estate Investing
Low Costs
Passive real estate investing is a great way to invest in real estate without worrying about the day-to-day maintenance of the property or dealing with tenants. You do not have to deal with the headaches of finding occupants, maintaining the property, or handling any repairs that may come up in your condo or house and lot for sale.
Less Time-Consuming
Passive real estate investing is the ideal strategy to build substantial and lasting wealth scale through purchasing homes such as condos or house and lot for sale. If there are no passive alternatives, investors may find it challenging to manage their other obligations and duties necessary for success or solvency as their full focus will be needed if they are actively investing in real estate. Conveniently, passive investors spend money on investments that allow them to profit without having to do any work themselves.
Tax Benefits
Passive investing allows investors to defer paying income taxes on any interest or dividends they earn from investments in rental properties. This can be beneficial for individuals who are just starting out on their career path or those who are older and looking for ways to save money over time without having to pay taxes on it until retirement age (when most people file).
Cons of Passive Real Estate Investing
Little to No Volatility
Investors are locked into their assets, regardless of what occurs in the market, because passive funds are restricted to a particular index or fixed set of investments with little to no volatility.
Small Returns
Even in turbulent times, passive funds will almost never outperform the market because the majority of their core assets are committed to following the market. A passive fund may occasionally outperform the market somewhat, but until the market, as a whole booms, it will never achieve the high returns that active investors seek.
What is Active Real Estate Investing?
Active real estate investing refers to the process of making investments when a person, entity, or fund is personally active. It is a more hands-on way to grow your money that necessitates your time, money, and risk. An active real estate investor is deeply involved in the process, either throughout it whole or in significant portions of it (such as acquisition, buying and selling, making repairs, or renovation) and they frequently need a degree of dedication comparable to a full-time job.
Unlike passive investors who would rather hire someone else to maintain their portfolios, investors in active investing are the ones who consistently monitor their portfolios, rather than letting them sit idle or underperforming. This indicates that they are the ones who weigh the risks and benefits of each investment they make. Hence, their main objective is to regularly predict when to buy and sell properties at a price that will result in a profit. Active investors are also known as “active traders” or “active managers”.
But although active real estate investments have their benefits, it also comes with some downsides.
Pros of Active Real Estate Investing
Flexibility
Active managers are not obliged to adhere to a certain index. They are free to purchase the stocks they consider to be good and worthy.
Hedging
Active managers have the ability to abandon certain stocks or sectors when the risks become too great and can also hedge their bets using a variety of strategies.
Tax Management
Specialists can customize tax management methods for individual investors, such as by selling investments that are losing money to offset the taxes on the huge winners, even if this strategy may result in a capital gains tax.
Cons of Active Real Estate Investing
Attention to Market Trends
The biggest disadvantage of active real estate investing is that you need to pay attention to the market trends in order to be successful—and even then, there is no guarantee of success.
High Risk of Losing Money
If you are a novice investor, there is a high risk of losing money if you choose the wrong property or location for your investment.
The choice between active and passive investing in real estate can be quite difficult for many people as investors and wealth specialists tend to favor one strategy over the other. Hence, it is important to carefully look at the differences between the two and see which one suits you and your lifestyle the best.
Read more: Benefits of Real Estate Investing
