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Those seeking a reliable reoccurring income and capital appreciation often invest in real estate. Owning real estate can lead to higher returns than other investments. Historically, they have a reputation for low inflation.

Passive and Active are two strategies when choosing a real estate investment. In this article, we explain the differences between passive and active methods and the benefits and disadvantages of each.

What is Passive Real Estate Investing?

Passive real estate investing is for those who don’t want to take on the day-to-day management of properties. This approach allows individuals to earn income from real estate while minimizing the involvement with operational aspects.

Passive real estate investing typically consists of investing money into different channels. These include real estate partnerships, investment trusts (REITs), or other investment vehicles. These investments can range from rental properties to commercial real estate, or crowdfunding platforms.

Benefits and Disadvantages of Passive Real Estate Investing

Benefits of Passive Real Estate Investing

      • You need minimal time commitment for daily management of your accounts.
      • Diversification reduces risk as the investor can invest in several properties at once.
      • Experienced property managers address property management. This increases the likelihood of returns on your investment.
      • Lower capital requirements through REITs or Crowdfunding platforms make investments accessible to a broad range of investors.
      • Publicly traded REITs offer a higher liquidity compared to direct property ownership. This allows for easier entry and exit of the investment.
      • Often provides a steady income through dividends and interest earned, which can be more predictive than other active investments.

Disadvantages of Passive Real Estate Investing

      • Investors have limited control over management decisions, relying on the expertise of the managing entity.
      • Professional managers charge for their services, so management fees reduce your overall return.
      • Real estate market conditions are closely tied to market performance. This can affect returns during downturns.
      • Passive investing is subject to regulatory changes that can impact performance, REITs, and crowdfunding platforms.

Types of Passive Income Investments

A couple of common passive income investments include rental properties and REITs.

Rental properties are the most common sources of passive income. Most lease agreements last 12 months, and corporate lease agreements can often last 5, 10, and 15 years.

The average renter often renews their lease, as research shows the average US renter stays in their unit for 27.5 months. Special use property, such as storage units is another wise investment. The average duration of time a person leases is 14 months, with 50% of that for at least 12 months.

Real Estate Investment Trusts (REITs) are highly liquid stock assets. Many investors trade the largest REITs publicly on the stock exchange. Some drawbacks to REITS exist as well. These include dividends being taxable as regular income in addition to several levels of management and transaction fees.

What is Active Real Estate Investing?

Active real estate investing typically involves the hands-on management of each property one owns. This often begins when investors purchase a property. After, they improve their properties and then resell. Another option would be to purchase the property and manage the property themselves.

Benefits and Disadvantages of Active Real Estate Investing

Benefits of Active Real Estate Investing

      • Investors have complete control over all property decisions. This includes tenant selection, rental rates, and property improvements.
      • Investors have the potential to receive higher returns on their investments. They can implement improvements and strategies to maximize rental income and property value.
      • Active investors can take advantage of the tax benefits, including mortgage interest, property taxes, depreciation, and expenses related to property management.
      • Investors are in full control of increasing their potential property value through renovations, better management practices, and improvements.

Disadvantages of Active Real Estate Investing

      • Managing properties is a time-consuming venture. Property managers mainly work with tenants, maintain, and perform other daily operations.
      • Potential stress from dealing with tenant problems, and handling unexpected issues can arise.
      • The risk of vacancies leads to periods of no rental income and increased financial pressure.
      • Active investing often requires a higher initial capital for property acquisition, renovations, and ongoing maintenance costs.
      • Property values and rental incomes can change based on market fluctuations, economic conditions, and local real estate trends.

Types of Active Income Investments

Some active property investment options include property flipping and short-term rentals.

Property flipping includes acquiring a property below market value. Estimating the cost of renovations and then selling it fast enough to keep within the same market conditions.

Month-to-month rentals can include various sources of income. Investors can earn money by renting out a room. They can also make money by owning a vacation property that is rented out often. Another option is leasing a property on a month-to-month basis for a steady income.

All real estate strategies fall into either the active or passive categories. Both of these strategies have their benefits and downfalls. Choosing the right strategy for your investment can be a lucrative source of income.