My first real estate development project taught me a lot, both about the process of building a medical facility from scratch and also the massive impact a passive income check can have upon my daily happiness.
Let me explain.
I found that I thrived on developing commercial real estate alongside an expert team. But I do it to create the long-term passive income – not give myself a second job.
I entered dentistry because I thought it would bring financial security to my family, and allow me to have a positive impact in people’s lives. But that wasn’t fully true. I gave so much of my time to build my practice and my family life and my body were pying the price.
Meanwhile, my real estate project was actually providing more reliable income while also building my long-term wealth.
My real estate investments were giving me more free time by allowing me to work less in my dental practice. These investments were also paying out completely passive returns for my friends and family who joined me as fully passive investors.
Had I decided to buy a bunch of rental properties, however, I would have had to deal with tenant evictions, surprise repairs, and other headaches that come with being a landlord. Just like some of my friends in the industry.
That’s why I love commercial real estate. While I enjoy working to put the deal together behind the scenes and maange the process, I really love getting the passive income checks once the project is complete. Thanks to the syndication structure of these projects, you can join the group and receive the same benefits of real estate investing without any of th hassles of being a landlord.
In this article, you’ll see what passive real estate investing means and find out whether you should be an active or passive investor.
What It Means To Be An Active Investor
When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an active role in the investment.
The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
What It Means To Be A Passive Investor
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
Should You Be an Active or Passive Real Estate Investor?
Here are 10 factors to help you decide which path is right for you.
#1 – Tenants, Termites, Toilets and Calls at 3AM
If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role.
Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.
#2 – Time
Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.
#3 – Involvement
How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?
#4 – Profits
With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.
This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.
#5 – Expenses
Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make an initial capital investment.
#6 – Risk and Liability
With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.
#7 – Paperwork
Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.
With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.
#8 – Team
As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.
As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.
#9 – Diversification
With active investing, you would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.
With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.
#10 – Taxes
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year.
Conclusion
If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you.
However, if your time is limited but you have capital to invest, you might want to consider being a passive investor.
If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.
When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.
Next Steps
Here at Cochran Capital, we give you access to real estate investing opportunities that give real cash flow, equity and appreciation, not to mention tax advantages for high-income earners. We want to help you leverage the power of commercial real estate investing in your portfolio so you can take advantage of these benefits.
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If you’re looking to diversify your capital and get back your free time, we invite you to sign up for our Cochran Capital Investor Club to get access to our current or upcoming opportunities.
