What Kind of Investor are You? Active or Passive - Article | Think Realty
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Which Investor Type are You?

Investor

There’s no doubt about it, real estate is an inefficient investment by nature. Each investment and investor has its own unique characteristics and requires our most valuable resource…time!

Time is Valuable

Your time commitment is perhaps the most significant problem investors face when growing their portfolio. Real estate investing can quickly become a full-time job. This is the exact reason financial advisers and people working with the “masses” tend to steer away from direct real estate investment as an option. Instead they favor passive investments like bonds, mutual funds, and real estate investment trusts. This is one of the reasons busy professionals tend to have a tough time growing their wealth with real estate.

Real estate investing is a business. Every successful business owner comes to a point where they ask themselves, “Is the time I’m spending to operate my business getting in the way of growing it?”  It’s important for every investor to ask themselves what is essentially the same question, “Am I spending more time operating my portfolio than building it?”

Two Types of Investors

Maybe I’m oversimplifying here, but after working with hundreds of investors from around the world, I believe there are two types:  Active Investors and Passive Investors.

1| Active Investors

An active investor tends to do most of the leg work and run the day-to-day operations themselves. While they may not be fixing faucets, and picking up rent checks, they’re constantly managing the people who are. They evaluate and visit many different properties in order to find the best deal. They then put together a crew or hire a company to do the remodel work. When the property is ready, they either find a tenant, or have a property management company do it for them. If they’re not self-managing, they end up managing the property manager. These investors often have the mentality of, “If you need something done right, you have to do it yourself.”

Active investors tend to be people who enjoy being in the real estate business because it is interesting, exciting at times, and keeps them busy.  Typically, you’ll find real estate brokers, property managers, fix-and-flippers, and contractors in the active investor category.

2| Passive Investors

A passive investor is just the opposite. They want to be invested in real estate but don’t want to deal with the day-to-day issues that come along with it.  They’d rather build their portfolio than operate it. In order to do this, a passive investor typically finds or builds a team of real estate professionals who do the work for them. They look to leverage their time, knowledge, and resources through others.

Rather than going out and finding individual properties, they typically use passive investment vehicles. These are vehicles such as joint ventures, private loans, and private equity funds. Passive investors have a tendency to either be retirees or busy professionals such as doctors, attorneys, executives, and business owners.

Many people start out as an active investor and grow to the point where being active in all their deals is no longer feasible. At this point they’re faced with a tough question, “How much control am I willing to give up?” They also ask, “Am I going to make as much working with someone else as I can if I’m doing it all on my own?”

What are You Looking for?

This can feel like a big leap of faith, but doesn’t have to be as complex as it seems. It really comes down to further defining what you’re looking for and following this simple process.

1| Consider the area and/or types of assets in which you want to invest. I’d encourage you to do some exploring and see what’s possible. You may be able to have direct ownership of larger assets and better returns that you thought were out of reach.

2| If you’re looking to leverage the time, knowledge, and resources of others, it makes perfect sense to build your team first. Find some institutional companies that handle the day-to-day operations of real estate in-house. This way you don’t have to piecemeal an entire team together yourself. This would be considered your “investment provider” or an institutional investment company.

3| Conduct your due diligence. Consider the basic questions, most importantly, “Is my investment provider’s best interest in alignment with my own?” In other words, are you making the first portion of the return on your investment before the provider makes a profit? The investment provider should be on the hook to meet certain performance benchmarks before they profit from your investment. This is far better than a fee based model in which a provider profits regardless of how your investment performs. Also, ensure that you have actual real estate securing your money, rather than just a contractual agreement.

4| Invest at a level that’s comfortable for you to test the waters. This will allow you to get to know your investment provider and find out how they perform. You may be pleasantly surprised and find that your returns actually exceed those of your own active investments. Continue to grow the relationship with your provider and invest more only as you feel comfortable.

Whether you are a long-time active investor looking to free up time, a busy professional, or a retiree who doesn’t want to deal with day-to-day operations, passive investments are closer than you think!


Note from online editor: This article has been brought back to life from our extensive archive. Originally published on May 29, 2014, it has been updated and republished for your enjoyment and education.