Active Vs. Passive

Active Vs. Passive Investing in Real Estate

When do you think of real estate investing, what comes to mind?

There are hundreds of different real estate investing strategies from which to choose. The difficult part is identifying which investment strategy fits your current goals and risk tolerance level.

Generally, investment strategies fall into two categories: Active Vs. Passive.

Which one is best for you?

We will define “active investing” as the acquisition of a single-family house (SF) with the goal of utilizing it as a buy and hold or fix and flip property. Alternatively, “passive investing” can mean placing your capital into a real estate syndication (more specifically, apartment syndication) that is managed in its entirety by a sponsor such as Direct Source Wealth.

In order to determine which investment strategy is best for you, it is important to understand the main differences between them. Let’s examine two main categories that help distinguish the two options: control and time commitment.

Control

When you are a passive investor, you are essentially a limited partner in the deal. You give your capital to an experienced sponsor such as Direct Source Wealth who will use that money to acquire, underwrite, structure and manage the real estate project.

You have no direct control over the business plan, so you are putting trust in the sponsor and their team. This trust is established through an alignment of interests. For example, Direct Source Wealth offers investors a preferred return, which means that you will receive an agreed-upon return before DSW receives a dollar. Therefore, DSW is financially incentivized to achieve a return above and beyond the preferred return. Direct Source Wealth also co-invests in each deal, so that the companies’ capital is also invested in the project alongside the investors.

As an active investor, you directly control the business plan and decide which investment strategy to pursue. You decide which renovations to perform, what quality of tenant to accept and the rental rate to charge. You determine when to refinance or sell. All of this comes, of course, at the tradeoff of your time.

Time Commitment

Active investing comes with the disadvantage of a greater time commitment. First, you must continually educate yourself on the ins and outs of real estate investing. Then, you must build a team of CPAs, lawyers, bankers, brokers, property managers and so on… to help you manage your projects. Once you have a team in place, you have to find, qualify and close deals. Even if you put a property manager in place, you’re responsible for making big decisions, which can come with a lot of stress and headaches.

Automating this process requires a certain level of expertise and large time investment to implement effectively.

On the other hand, passive investing can be much more hassle-free. You don’t have to worry about any of the steps described above. You simply invest your capital and read the monthly project updates.

Conclusion

Choosing an investing strategy or a combination of strategies can be complex and is unique for each investor. It’s important to understand the pros and cons associated with each strategy to determine which will help you get closer to achieving your goals. Give us a call or schedule an appointment below for a complimentary 15-minute strategy session where we can discuss your situation in more detail and see if passive investing is right for you.image

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