As time passes, the old “get a job, work 9-5, live frugally, and shove money into your 401(k)” adage is becoming less and less relevant. As Nova and Reinicke outline “around half of the private sector workers aren’t covered by an employer-sponsored retirement plan” and approximately 25% of all Americans do not even have $10,000 saved for their retirement. For those in similar circumstances or even for those looking to diversify their streams of income, real estate investing could present a solution.
If you determine that you want to invest in real estate, you will likely encounter an age-old question: Should I be an active or a passive real estate investor? Before looking at the pros and cons of each, let’s first make sure we are on the same page about what each is.
Active Investing: The hands-on approach
Active investing is a type of investment that requires active participation from the investor. As an example, an individual interested in actively investing in real estate could decide to purchase and manage properties for rental income or purchase an asset that requires work, renovate it, and flip it for a capital gain/profit.
Passive Investing: The hands-off approach
Passive investing is a type of investment that typically requires low or no active participation from the investor. As an example, an individual interested in passively investing in real estate could decide to invest in a Real Estate Investment Trust (R.E.I.T.), a company (private or public) that owns and operates income-producing real estate, by purchasing a share of the company and receiving dividend payments.
Active vs. Passive Investing
This is a question that only you can answer given that everyone’s personal lives and circumstances will vary greatly. According to Ryan McKenna, the founder of McKenna Capital, there are five important factors that one should consider when deciding which real estate investing strategy to pursue:
1. Control
2. Time commitment
3. Diversification
4. Deal flow
5. Risk
Control
This goes hand in hand with either being an active or passive investor, with an active investor having much more control over the investment than the passive investor. For individuals looking to maintain control of the asset/investment, develop, iterate, and execute a business plan, active investing is probably the route that you’ll want to pursue since you will have full ownership of the investment strategy that you decide to pursue. For individuals that are okay with giving up full control and prefer a hands-off approach, passive investing is probably the route that you’ll want to pursue. If you ultimately decide to become a passive investor, do your proper due diligence on the individual/team/investment that you are interested in and make sure that your interests are aligned.
Time-Commitment
There is a relationship between the type of investor, active or passive, that you decide to be and the time commitment that will be required on your part. If you want to be an active investor, you will be forced to commit a larger block of time to do market research, look for properties, analyze deals, oversee improvement, maintain the property, manage the property management company, etc. If you are a passive investor, you will typically be placing your capital in the hands of an experienced investor, trusting that they have the team and business plan required to ensure the investment will be a success. Thus, while passive investing will be hands-off, you will still want to keep track of your investments and make sure that returns are being met.
Diversification
As an active investor, you (or your team) have to be an expert on a given asset class and a particular market. Thus, your ability to learn about an array of different asset classes and markets may be limited given that you do not want to spread yourself too thin. As a passive investor, diversification is your friend. You have the opportunity to diversify across various deals, with different active investors, different asset classes, different markets, and so on.
Deal Flow
The old saying “it’s raining money” does not apply to deal flow. While it is important to see opportunity in every deal out there, the reality is that not all opportunities will meet your investment criteria. Thus, as an active investor that is targeting a specific asset class and market, it is important that you are actively pursuing deals that meet your criteria. This involves things such as having a great relationship with real estate brokers, engaging in direct mail campaigns, etc. As a passive investor, you do not worry as much about deal flow given that you are taking the hands-off approach and focusing on diversifying your investments.
Risk
Full disclosure, any and all investments carry some type of risk. If an individual comes to you with a “risk-free” way to make money, especially in real estate, run for the hills! Active investing typically carries higher risk given that an entire business model and investment strategy is in your hands – not to mention that you will probably be the individual signing on legal documents e.g., loans. As a passive investor, you will still see some type of risk. If the investment goes south, however, your losses are limited to the amount that you invested. In other words, your personal assets are probably going to be protected.
Conclusion
At the end of the day, only you can determine whether real estate investing is right for you. As a starting point, think through your personal circumstances and the aforementioned considerations. Know that every investment strategy will be different, that each investment strategy has it’s own pros/cons, and that all investing carries a risk so as you continue to gauge whether you should invest in real estate, do your proper due diligence.
Investing in Real Estate comes with several advantages. Navigating the real estate investing process can be difficult, but you do not have to do it alone. We are here to help.
How You Can Get in On the Action
Cash Flow Champs is a privately held investment company that focuses on acquiring and managing opportunistic and value-add multifamily real estate properties. The company specializes in repositioning well-located assets in emerging markets surrounded by positive demand drivers such as population growth and job growth.
Cash Flow Champs partners with entrepreneurs and busy working professionals interested in investing in real estate but who lack the time to navigate the process. Alongside our partners, we aim to bridge purpose and profits in a manner that allows us to improve the lives of the residents in our communities and the neighborhoods where we operate.
In the words of Robert Kiyosaki, the poor and the middle-class work for money. The rich have money to work for them. If you are an individual that wants to build and maintain generational wealth through real estate, all while making a positive impact on the lives of residents and the communities where you invest, we’d love to explore opportunities for synergies.
Schedule a brief call with us so we can get to know you better, understand your life goals, and determine where synergies may exist.
This information presented on this site is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company or any related or associated company and is not a recommendation to pursue a specific investment opportunity. Any such offer or solicitation will be made only by means of the company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities laws and other laws.
