Active vs. Passive Real Estate Investing

Investing in real estate is such an incredibly attractive idea. The many benefits of investing in real estate include cash flow, excellent returns, and many tax advantages.

Of course, Chip and Joanna and a ton of other “reality” TV shows make the fix and flip look so easy. But the complexities of getting started in real estate can be overwhelming. In fact, getting started can be so daunting that many either fail to act or they get stuck in a money pit.

Here’s the good news—real estate investing doesn’t have to fill you with fear. We have a solution—a simple way to build wealth by investing in real estate through passive investing.

First, let’s break down the difference between active and passive investing.

What Is Active Real Estate Investing?

Active real estate investing is the ongoing process of buying and selling for a profit. As the name implies, active investing requires you to get involved. You need to come up with capital, look for investments, and manage your investment wisely.

Here’s a typical example of fixing and flipping a property—a popular method of active investing.

Making money from a fix and flip property requires several things. First, you need to find a 20% cash down payment then find financing for the remaining 80%. Next, you must find a suitable property, accurately estimate the renovation costs, and pay for labor. Lastly, you need an exit strategy—selling the property or finding a tenant.

Have you heard the saying: “you make your money when you purchase.” What does that mean? Your chance of making an excellent return on investment (ROI) hinges on finding the right property for the right price. Most investor startups make the mistakes of buying high, not having the time to see the project through, and not managing their money. The result? Hardly any profit or—worse still—making a loss.

Active real estate investing: The pros

Here are the advantages of active investing:

• You have control over your investment.

• More risk means more reward.

• Outsource as much as you want.

• It’s a good introduction to real estate.

Active real estate investing: The cons

Here are the disadvantages of active investing:

• You need excellent knowledge of the real estate market.

• You must have a good network of professionals.

• You are responsible for due diligence—sourcing the right property, creating a scope of work, inspection, and more.

• Finding a sizeable down payment and earnest money.

• Financing repairs and contact work.

• Being responsible for all the repairs and renovations—either you invest “sweat” equity, outsource it, or oversee it.

• Unexpected rehab surprises that can send budgets skyrocketing.

• Coming up with an exit strategy—selling involves fees, and finding good tenants is stressful.

• You have to wait for longer to make money.

• Potentially smaller returns.

Active investing has its advantages and disadvantages. But when you look at the long list of disadvantages, you understand why many people hold off investing in real estate. After all, without the relevant know-how, you risk losing a ton of money.

But surely there must be an easier way to get started in real estate investing—and there is. You can scale up this “fix and flip” concept with multi-family properties.

Did you know you can invest in multi-family real estate and get an incredible ROI but with less money and less responsibility? Yes, it’s true. The answer is passive real estate investing in multi-family properties.

What Is Passive Real Estate Investing?

Passive real estate investing is when you invest in a property without being involved in managing it. You can be as “hands-on” or as “hands-off” as you want to be. Passive investing allows you to gain profits from the investment, without the stress and hassle of renovations or being a landlord.

How does passive real estate investing work? Let’s take the example of investing in a fix and flip property. We can apply this to passive investing in multifamily properties. Rather than do all the work yourself, you find an experienced, trusted investment group - like Rockwell Capital Group. The knowledgeable partners are the ones who do all the work. This includes the following:

• Due diligence.

• Financing the down payment.

• Purchasing a suitable multi-family property.

• Overseeing and financing the renovations and rehab.

• Managing the exit strategy—either selling or renting to tenants.

As the passive investor of a multi-family property, you are an owner of the property, but without any hassle.

Usually, while renovations and improvements are ongoing, you receive a monthly or quarterly cash flow distribution. After the property is sold or refinanced, you receive your share of the profits.

With passive real estate investment, you make your money when you invest in those who have the know-how.

In most cases, passive investors double their investment—in other words—ROI is usually 100%.

Four Benefits of Passive Real Estate Investing

Passive real estate investing in multi-family properties is one of the easiest ways to get started in investing. Passive investing takes less time, carries fewer risks, and is ideal for first-time investors.

Let’s look in more detail at the four main advantages of passive investing.

1. Passive real estate investing is ideal for beginners

You don’t need extensive real estate knowledge to start investing in multi-family properties. Even if you don’t know where to start or what to do, you can make substantial profits. Just a basic understanding of investing and investment analysis is necessary.

2. Passive investing requires a smaller buy-in

You can get started investing in real estate with less money than active investing. Active real estate investment has greater risks—especially for beginners. And you must make a substantial and risky financial investment. With passive investing, you never need to worry about spiraling renovation costs.

3. Passive investing in real estate has more options

Yes—multiple streams of income are available if you are a passive investor. Because you can get started with a lower financial outlay, you have greater opportunities to diversify your investment portfolio.

4. Save time with passive investing

It makes sense to leave the stressful job of managing a fix and flip or looking after tenants to someone else. Passive investing allows you time to get on with your other responsibilities—your full-time job, family life, or favorite hobbies. Passive investing takes up less of your time so you can concentrate on other things.

Passive Investments Build Massive Wealth

Most experienced investors prefer multi-family properties as the vehicle for quickly building massive wealth. It’s clear that the benefits of passive investing—profits, cash flow, and tax benefits—far outweigh anything active investing has to offer.

Rockwell Capital Group is a Multi-family Real Estate Investment Firm. We carefully acquire and manage large multifamily apartment buildings in markets with a strong economy, that show consistent job growth. This will allow us to provide a strong return to our investing partners. If you are interested in learning more, click the link below to schedule a 1 on 1 call. We would love to brainstorm and see how multi-family can benefit you!