When you look around at all the different buildings and real estate asset classes in the world around you, they were all built and traded thanks to investors. When you think about it, the office you work in, the home you live in, the grocery store you shop at, the hotel you vacation in, and the industrial building that your plumber or electrician works from, were all built (and in many cases, later sold to) investors like you and I. Every piece of real estate property you’ve ever interacted with was built and subsequently purchased by groups of investors who are seeking capital preservation, cash-flow, equity appreciation, and tax benefits. It’s important to know the two primary types of investors and which type of investor you are. The two main types of investors we’ll discuss are Active Investors, and Passive Investors.
WATCH: In the video here below, HDH co-founder Rob Overstreet talks a bit more about this concept!
As the name would suggest, an active investor is the ‘active’ managing partner of a given real estate deal. Active real estate investors are full time investors that work in the field daily. An active investor dedicates their time and energy into building critical relationships, studying markets, finding deals, obtaining debt financing, guaranteeing loans, managing the properties in the portfolio, taking care of all the administrative tasks (such as annual taxes) and later handling the disposition of the assets in the portfolio (selling the deal). An active real estate investor spends a lot of time, energy and resources into their education and skillset through mentorships, trainings and webinars hosted by industry thought leaders so that they always have expert insight into market trends and best real estate investing practice. An active investor typically spends years working to master their investing profession and, in every case, has had multiple mentors to learn from and guide their career. An active real estate investor has the responsibility to manage and maintain all the business affairs of a given real estate deal from the daily oversight of the property to be sure the business plan is being executed, to the annual tax returns and other administrative duties required to successfully operate a real estate investment.
Conversely, the passive investor as the name would suggest is ‘passive’ in the capital stack of a real estate investment. The passive investor approach is a ‘hands-off’ way for an investor to participate in all the benefits of a real estate investment opportunity. A passive investor understands the benefits and importance of diversifying into real estate, but in many cases does not have the time to learn about all the steps and systems required to manage and operate a real estate investment or does not want the burden of being a landlord. The passive investors in a real estate syndication or investment do not have to deal with the daily management and other duties related to a real estate deal that an active investor does. A passive investor is typically grouped with several other passive investors to pool funds into a real estate deal with the common goal of making a profit and participating in the many other benefits of real estate ownership without all the headache of being a landlord. Passive investors usually own the majority share of a real estate deal while the active investors keep a smaller share in exchange for their real estate expertise and ‘actively’ managing the investment. As an equity owner, passive investors are issued K-1 tax forms each year so they can participate in the tax depreciation benefits of real estate ownership pro-rata based on their investment allocation.
What is the clear difference between an active and a passive investor?
Active investing necessitates a hands-on approach from a portfolio manager or other “active investor”, while a passive investor buys index funds or other mutual funds so they don’t have to buy and sell as much.
Which is Better? Active or Passive Investor?
While the answer to this depends and who the person you are asking, some other investors find active investors more helpful during crucial times or market stress.