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

Sam Miller
Sam Miller
October 27th, 2022

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.

Next, the amount of risk needs to be at the forefront of your mind. As mentioned earlier, active real estate investing has greater risk exposure because investors bear the brunt of all losses or unexpected costs that arise during property management.

Passive real estate investing has less risk exposure in comparison. Moreover, since passive real estate investors collaborate with syndication companies, the companies’ experts find ways to curb risks before the investors are significantly affected. In case of losses, they are shared among many other passive investors collaborating with the syndication companies.

It is essential to consider the amount of control you want over the properties as it determines the best option for you. The active real estate investor controls the strategy and the type of assets to select, among other critical investing decisions.

Passive real estate investing is a hassle-free method that offers less control of the strategies and the selected assets. The passive investor does most of the work initially, searching for the best syndicators to entrust their capital to.

After the initial investment, all passive investors will have to do is review regular updates from the syndicators and await dividends. The more advanced tasks are left to expert syndicators.

If you don’t know much about real estate or are just starting out, passive real estate investing may be your best path. You will be better off seeking the expertise of established real estate syndicators as you slowly educate yourself in the area.

It would be best if you took some time to contemplate the approach as you consider how to invest in real estate syndications. One of them is investing in tools such as Vyzer to help you manage your entire wealth portfolio. The platform makes critical investment processes such as wealth transfer planning easier.

The resources you bring to the table are as crucial as the other factors on this list. Time is essential to think about in the real estate investing world. Researching the property market, seeking investors, securing funding, and negotiating and acquiring property are all time-consuming real estate investing activities.

These activities also require knowledge of the real estate investing space and talent, such as negotiation skills.

Your category will also depend on the assets you possess based on your unique circumstances. For example, high-earning individuals such as surgeons and software engineers are more likely to possess cash, credit, and equity capital. On the other hand, most of them have very little time to spare. They may also have limited knowledge of real estate investing.

Going the passive route suits them best. They can entrust their capital to syndicators and leverage the resources that the syndicators provide.

On the other hand, most other individuals do not have the first four essential resources. Such individuals may have time on their hands to acquire the last three necessary resources and participate in the real estate investing process actively.

For instance, they could take courses in real estate investing and gain experience working as real estate agents with more established syndication companies. Finally, they could offer services to the first group after gaining the last three essential resources: talent, strategic networks, and opportunity control.

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.