Everyone knows you can make a ton of money in real estate. The question that everyone faces is how they fit into the multifamily real estate investing world.
- Should you buy a duplex?
- Should you buy an apartment building?
- Do you have time to take care of real estate if you buy it yourself?
- Should you invest passively in real estate?
I watch people wrestle with this decision almost every day. In this article, I will list out some of the various things you should consider when making this decision. It is really a question of should you be an active real estate investor, or should you be a passive real estate investor?
OK, let's dive into the differences between active and passive real estate investing and hopefully help you through this decision process.
Active Real Estate Investing
What is active real estate investing?
When I refer to active real estate investing, I am referring to an investment that you are making yourself in real estate where you are the one responsible for operating that property. That could mean that you're in charge of maintaining it. It could mean that you're in charge of leasing, or maybe even doing the bookkeeping. What is important here is that you are the one responsible for getting the work done, even if that means calling a plumber or handyman to do the work.
The question is, what type of person should actively invest in real estate? If you don't like spending your weekends and evenings working on your property, then active real estate investing is probably not for you. Most people think that just because the property is small, like a duplex or a single-family home, there won't be anything to do to run the property. Interestingly, if you talk with someone who owns one of these properties, they will tell you that they devote more time than they initially planned to run their property.
So, the bottom line is, if you value your weekends and evenings, don’t be an active investor.
Passive Real Estate Investing
On the other hand, passive real estate investing is, quite literally, passive. With this type of real estate investing, the extent of your involvement in that property is writing a check for the capital required to purchase it or fix it up. You play no significant role in the ongoing operations of that property or its maintenance.
Although this is exactly the opposite of active real estate investing, many people try to convince themselves that they are passively investing in real estate when they are actually running the property operations. They think that just because it is a small property or it doesn’t require a ton of work all the time, that they are passive investors.
What type of person should passively invest in real estate? Again, as I have had the opportunity to talk to literally hundreds of people contemplating how they're going to get into the real estate game, I have a unique perspective. My answer is easy – MOST PEOPLE SHOULD BE PASSIVE INVESTORS!
Unless you are willing or want to quit your day job and transition your life to being a real estate professional, I strongly recommend being a passive investor in real estate projects with experienced sponsors and fund managers. The reason I say this is that real estate is no different than any other business. Although it seems simple to an outsider, real estate is a business. Running a real estate operation is no different than running any other business.
The most important thing you can do when contemplating how you're going to get your share of the profits associated with real estate investing is to be realistic. When evaluating your time constraints, your true long-term objectives, etc. be honest with yourself. Remember, the grass isn’t always greener on the other side!
