If you want to start investing in real estate, you’ll soon come across the terms ‘active’ and ‘passive’ investing. If you are unfamiliar with real estate investment strategies, these terms might be misleading or confusing.
This post will help clarify the difference between active and passive real estate investing strategies so that you can decide which option is best for you.
The Main Difference Between ‘Active’ and ‘Passive’ Investing
In general, the most significant difference between active and passive investment strategies is the level of work the investor performs in finding, purchasing, developing, and managing their investments.
Brief Overview: Active Investors. As the name implies, active investors are heavily involved in the investment processes. They exert a great deal of control over important decisions but have a much greater workload as a trade-off.
Brief Overview: Passive Investors. Passive investors are not involved in important investment decisions. They simply provide capital—either directly or indirectly—to companies that engage in ‘active’ real estate investing.
Summing Up the Main Difference. Active investors do all of the hard work—the researching, analysis, drafting, and managing—but have greater control over the whole process. In contrast, passive investors do none of the work but have no say in important decisions.
Active Investing Strategies
Get ready for a long list—active investors do a lot of work, some of which includes:
- Scout out potential investment properties
- Compare and contrast similar properties to determine which one is the best investment
- Conducts due diligence on a property to make sure it is exactly as it appears
- Raise capital to make a direct purchase or fund business activities (by finding passive investors)
- Decides on a development strategy to make the property profitable
- Finds prospective tenants to occupy the space
- Drafts and negotiates leases with tenants
- Conducts financial analyses to make sure property profitability is on track
- Decides when to sell a property if it has met its investment goals
As one might assume, active investors must complete a bunch of work in order to be successful. To be an active commercial real estate investor at scale requires the full-time labor of a whole staff of employees who specialize in the various tasks needed to bring in a profit.
Because of the amount of work required, most individuals cannot possibly hope to manage more than a few small commercial properties, let alone a whole portfolio. Doing so requires more work than one full-time job allows. Being a successful active investor is simply not an option for most people who already have full-time jobs.
Luckily for most amateur real estate investors, many large-scale real estate investment companies (the active investors) are more than happy to take passive investor capital to fund their businesses in exchange for a share of the profits.
So, what are some ways passive investors can get exposure to real estate?
Passive Real Estate Investment Strategies
As mentioned above, one of the tasks of the active investor is to raise capital for their investment opportunities. It is in this need for fundraising that passive investors find their opportunity to get in on real estate investing.
How It Works In Theory. Essentially, passive investors allocate funds to a professional real estate investment company, which uses the capital to (hopefully) return a profit. Depending on the success of the active investor, the passive investor sees returns on their initial investment, either in the form of annual returns or rising share/stock prices.
Different Ways to Passively Invest in Commercial Real Estate
If you want to get exposure to real estate without becoming a full-time investor, you’ll want to consider the following investment options.
REIT. A REIT is a real estate investment trust. These publicly traded companies perform all the due diligence and hard work required to successfully purchase, manage, and turn a profit on investment opportunities.
Passive investors can purchase shares in a REIT as they would a stock on the stock market. When the REIT grows in value as a company, passive investors who hold shares in the company see the price of their shares grow.
REIT ETFs. ETF stands for exchange-traded fund. Essentially, an ETF is a company that invests in other companies. Anyone with a brokerage account can purchase shares in an ETF as they would a stock. ETFs are considered less risky because instead of investing in a single company, the risk is spread across a large group of companies.
Usually, an ETF will focus on a single industry or niche within an industry. There are ETFs for solar panel producers and car manufacturers. Pretty much, there are several ETFs for any industry imaginable.
Therefore, a REIT ETF is an exchange-traded fund that specializes in investing in real estate investment trusts. By investing in a REIT ETF, investors speak their risk across several REITs rather than putting it all on one.
Crowdfunding Investment Platforms. Within the past decade, crowdfunding investment platforms apps have democratized access to many high-quality investment opportunities that were once only available to accredited investors.
Through apps like Fundrise and Yieldstreet, users can own a share in actual commercial property. This differs from other methods of passive investing because the investors have a direct stake in the properties.
Which Investment Strategy is Right for You?
Most people would have a hard time being successful active investors in addition to working full-time jobs in an unrelated field. That’s why for many newcomers to the space, choosing one of the passive investment strategies is the way to go. Which investment strategy is right for you?
About the Author. Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.