How to Know If Passive Real Estate Investing Is Right for You?

Commercial real estate investing is an attractive form of investment because it provides high yields when done right. It is critical to understand the various types of real estate investing and how you can best get value for your money, time, and skills.

As popular as commercial real estate investing is, most people are so accustomed to the active forms, so much so that only a few realize there are passive ways of investing in real estate.

This blog post breaks down both active and passive real estate investing. It explores the pros and cons of each and explains when you should select any of them. The information presented is a great way to help you choose the right path if you are starting your commercial real estate investing journey.

An Overview of Commercial Real Estate Investing Categories

The two most common types of real estate investing categories are active real estate and passive real estate investing.

Understanding the difference between them and making the right choice could determine whether real estate investing works for you or not. The two also determine on which side of the active-passive income spectrum the income generated from your investment efforts will fall.

Active real estate investing is the classic commercial variation popularized on reality TV. It requires more effort from the investor as it involves participating actively in primary investment activities such as researching the property market, identifying the property, securing funding, acquisition, development or renovation, and refinancing.

The most significant benefit of active real estate investing is the higher gain brought about by the associated risks. However, on the flip side, the high level of risk is its main disadvantage.

Passive real estate investing entails giving money to a seasoned real estate syndicator who acquires and oversees the property. It requires less individual effort and has less risk associated with it. However, you will gain less from the property than the active investor, for the same property with the same performance.

Which Category Is Right for You?

Whether you choose the active or passive option depends on several factors, including the amount of risk you are comfortable with, the amount of control you would like to have over the property, and the real estate investing resources you bring to the table.

The essential elements for real estate investing include capital (cash, cash flow, credit, and equity), time, skills, strategic networks, and opportunity control.

Risk Exposure: Active vs. Passive

Risk is a major consideration when deciding between active and passive investing. Active real estate investing carries greater risk since investors bear the brunt of all losses or unexpected costs that arise during property management.

In contrast, passive real estate investing involves less risk. Passive investors collaborate with syndication companies, which employ experts to mitigate risks. Any losses are shared among multiple passive investors.

How Much Control Do You Want?

Active real estate investors retain control over critical decisions, such as selecting assets and strategy. They manage everything from acquisition to financing.

On the other hand, passive real estate investors have much less control. Their primary task is selecting the right syndicator, after which they receive updates and dividends while the syndicator handles property management and decision-making.

Is Passive Real Estate Investing Right for Beginners?

If you’re new to real estate or lack expertise, passive real estate investing may be the better option. It allows you to leverage the expertise of experienced syndicators while you gain knowledge of the industry.

Time Commitment and Resources

Time is a key resource in real estate investing. Active investors need significant time to research properties, secure funding, and manage acquisitions. These activities also require real estate knowledge and negotiation skills.

If you have limited time but possess cash, credit, and equity, passive real estate investing might be a better fit, as you can rely on syndicators for management.

Active Investing for Those with Time and Skill

For individuals with time to spare and a willingness to gain real estate knowledge, active investing offers an opportunity to build skills and create a strategic network. Working with syndication companies or gaining experience as a real estate agent can help you acquire essential skills and resources.

Is Passive Real Estate Investing Right for You?

In conclusion, factors such as associated risk and the amount of control you want determine whether passive real estate investing is right for you. If you are comfortable with less risk, you should choose passive real estate investing. It is also suitable for you if you are still new to commercial real estate investing or don’t know much about it.

The necessary real estate investing resources you have on your hands, or those you lack, also play a big part. You should pick a passive real estate investing if you have little time to spare, as commercial real estate investing is time-consuming.