There are only 24 hours in a day. How would you rather spend your time? Finding and executing on investment properties? Or talking to active investors and receiving returns from the comfort of your home? The primary difference between being an active investor and a passive investor is a matter of which you value more control or diversification.
If you answered “yes” to the first question above, then you are interested in becoming an active investor. You have full control and responsibility of the investment property. You believe that your decisions will yield the most return for you and your investors. You decide the following:
- Finding the property
- Financing the investment
- Executing the most effective business plan
- Building a team to execute the business plan
- Communicating the progress to all related parties
- Dealing with property managers
- Understanding all the risks associated with the investment
The downside to becoming an active investor is that it requires a lot of time to educate yourself, build the team, and execute the plan.
If you answered “yes” to the second question, then you are interested in becoming a passive investor. As a passive investor, you are leveraging other people’s time and energy to use your money to execute a business plan. In exchange for your money, you will receive a return on your investment. Instead of having the control like an active investor, you have the ability to diversify. You can diversify by investing in different assets (such as mobile home parks and self-storage), with different active investors, and in in different locations.
This may seem like a dream scenario to have your money work for you while you relax on the sidelines. However, you need to be able to answer these core questions:
- How does the investment make money?
- Do you understand the business plan and how you will be compensated?
- Does this type of investment and business strategy match my investing strategy?
- Is the investment in a good location to thrive?
- Is the operator capable of executing on the business plan?
- Do you trust the active investor with your money?
- What happens if this investment does not make money?
These questions may seem scary if you do not know the answers, but you are protecting yourself and your investment. Another negative aspect for being a passive investor is that each investment requires a large investment-minimum amounts ranging from $30,000 to $50,000.
There is no wrong answer to whichever path you pick. I believe the things to consider are the amount of money you have to invest, how much control you want to have with your investments, and your strategy when it comes to diversification.
Thank you all, and remember to keep Leveling Up!
Mike is a CPA, founder of Next Level Investing, and host of the Next Level Investing Podcast. He began real estate investing in 2016 and is looking to show investors how to take their investing to the next level with real estate syndications.
Both paths require investors to know how their money is working – active investing requires a lot more attention though! Mike does a great job outlining the core questions that investors need to answer.