Are you an Active or Passive Investor?
Real Estate Investing can take many forms, all of which continue to cross over into one another as real estate investing continues to evolve. If you are looking for a basic distinction, we can begin by discussing the difference between an active or passive investor. Use this quick and useful summary to determine which type of investor you are.
The primary purpose of active investing is to outperform the market. In order to do this, the investor must continuously monitor his or her investments to exploit market inefficiencies. This type of investing is very involved, but consistent success is rare, especially for an individual investor. The benefit of active investing is the potential to make higher than average returns. The risk is mainly the difficulty and rarity in achieving this, especially on your own.
Essential Daily Demands:
- Active listing research online, studying the markets and/or zip codes you would like to invest in.
- Tracking inventory and demand in these zip codes.
- Researching sales prices versus offer prices.
- Hiring a Realtor to stay on top of recently listed properties or researching inside pocket/off market listings.
- Due diligence on the property you have chosen to invest in such as:
- Hiring a property inspector.
- Understanding the history of the property such a repairs, property management, and overall condition.
- If the market you are investing in is extremely competitive, you may have to make your offer on the property and arrive with a purchase agreement before you do your due diligence.
- Flip Versus Hold:
- Flip: Hire a contractor to rehabilitate any property shortcomings. Depending on how much money you are planning to put into the property you will also need to hire an architect. When you are ready to sell your property you have to hire a realtor, market your property, and conduct sale negotiation.
- Hold: Hire a property manager and purchase renters insurance.
- Keeping track of all of your expenses that will benefit your tax write offs at the end of the year
Passive investing, on the other hand, does not attempt to outperform the market, only match it. This type of investing manages risk and focuses on the aspects of investing that are controllable. It focuses on long-term returns and emphasizes consistency and very little involvement. In addition, a diversified portfolio is imperative. The benefits of passive investing are stability, consistency, and a lack of involvement. The risks include missing out on potential active investing gains. In passive investing, you must be satisfied to never beat the market, but rather match it. If stability and lower risk are appealing to you, then passive investing is the best approach.
Essential Daily Demands:
- Once you are finished doing your due diligence on your investment’s operator, you have no further demands.
- You can simply keep track
of your property by looking it up online if that is something you wish to do.
Now that you have a sense of what type of investor you may be, you are well on your way to start investing. However, the beautiful thing about investing in real estate is that you have the ability to wear a lot of hats. In this case, you may be at a crossroads and consider yourself both Active and Passive. If so, more power to you!