Active vs. passive real estate investing

Active real estate investing

Active real estate investing requires a large amount of real estate know-how and hands-on management. Ensuring the success of a property requires responsibility and experience; active real estate investors need both analytical and negotiation skills to improve their cap rate and overall return on investment.

Types of active real estate investing

House-flipping

House-flipping is the most active, hands-on way to invest in real estate. To “flip” a home, an investor purchases a home, makes necessary renovations to improve its value on the market, and then quickly resells it at a higher price.

Rental properties

Rental properties require a lot of hands-on management, but unlike flipping homes, they have a long-term investment horizon. Property owners earn cash flow usually on a monthly basis in the form of rent payment from tenants. This provides a steady, reliable income stream for investors, but it also requires a lot of work or delegation to ensure that operations are running smoothly.

Passive real estate investing

Passive real estate investing offers opportunities to invest in real estate for both people with extensive real estate and financial knowledge as well as those with limited or no expertise. Passive real estate investors typically provide capital and allow professionals to invest in real estate on their behalf. As with stocks and bonds, passive investors bear responsibility only for their investments.

Types of passive real estate investing

Private equity funds 

A private equity (PE) fund is an investment model where investors pool their money into a single fund to make investments. They are usually partnerships with a manager or management group. While the manager actively manages the fund’s investments, investors are not required to be directly involved on a regular basis. Access to private equity funds is generally limited to accredited and institutional investors with high net worth. Investment minimums can vary, but are usually not less than $100,000.

REITs

A real estate investment trust (REIT) is a company that makes debt or equity investments in real estate. Generally, REITs offer a portfolio of real estate assets to investors. Investors buy shares of the company and earn income in the form of dividends. Today, REITs can be categorized according to investor access in three ways: private REITs, publicly-traded REITs and public non-traded REITs.

• Private REITs are not registered with the SEC and are not publicly traded in the stock market.
• Publicly-traded REITs are registered with the SEC and traded in the stock market.
• A public non-traded REIT is somewhat of a cross between a publicly-traded REIT and a private REIT. They are registered with the SEC, but not traded on the stock exchange.

Online real estate investment platforms

Online real estate platforms pool investments and invest in real estate investment opportunities that would otherwise be difficult to find or access. Crowdinvesting real estate platforms offer investors the ability to invest in single investments or a diversified portfolio of real estate. Many real estate investment platforms carry restrictions such as accreditation requirements and high investment minimums.

Passive real estate investing: a deeper dive

Andrew Carnegie is famously quoted for his stat around real estate and millionaires:  

Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.

And it's true: real estate investing offers great potential to earn significant returns. It can become a valuable source of cash flow in your investment portfolio when managed wisely. But, chances are, you’re busy. This may mean that you don’t have time to be an active real estate investor, but that doesn’t mean you can’t gain any exposure to the asset class. This is why we love passive real estate investing strategies. 

Passive real estate investing offers the benefits of diversification, flexibility, and access, and especially with online investment platforms, the process is pretty seamless. 

• Diversification: As with any portfolio, diversification is key, and real estate is no different. It’s always a good idea to allocate your investment dollars to multiple opportunities so that your risk is less concentrated. The old cliche, “don’t put all your eggs in one basket,” rings true. Diversification comes in many forms: geography (where the investment is located), asset type (residential, commercial, mixed-use), deal type (individual property, fund), instrument (equity, debt), among others. The investment opportunities on real estate crowdfunding websites run the gamut. 
• Flexibility: In investing, having choice and agency is important. Let’s refer back to the diversification point above—there are clearly a lot of characteristics to consider when making an investment. The good news is, though, online real estate investment platforms offer the flexibility to choose where you want to invest. And not only where, but also with whom (the sponsor), and how much. Certain investment platforms offer low minimums, particularly those that facilitate investment from non-accredited AND accredited investors. 
• Access: Historically, real estate investing has been pretty exclusive, and has required a serious capital commitment. But now, online investment platforms are lowering the barriers to entry and providing a menu of real estate investment options to choose from.

Importantly, passive investing requires less of your time, since you’re engaging a third party to manage the investment on your behalf.

And, because passive investments still provide exposure to the same underlying real estate assets as active investments, the potential to make a significant return through income and appreciation is still very real. 

So, if you’re new to real estate, but you recognize the enormous advantages of investing in the asset class, congratulations! You’re already halfway there. Passive investing is a great first foray into real estate. 

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This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.