Many doctors and healthcare professionals have heard about real estate investing, however when they decide to get started, they find themselves facing several important questions. 2 of the main questions are what to invest in and whether to be an active or passive investor. Real estate is very broad and there are several ways to get involved. Some high-income professionals don’t invest in real estate as they imagine “real estate” as being a landlord and dealing with the headaches of tenants, toilets, and termites. However, this is not necessarily true. Of course, if you are passionate about real estate, have extra time and don’t care about rolling up your sleeves and working on renovations or repairs, the active investor route could be very rewarding.

On the other side – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord. In this article, you’ll see what passive real estate investing means and find out if you should be an active or passive investor. Honestly, there is not right or wrong and everything depends on your personal situation and point of view.

So, what 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, maybe do a couple of quick fixes, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.

I can tell you from personal experience (my wife and I own 11 properties in the Dallas Fort Worth area); 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.

To be fair, it gets better after some time. You make the adequate repairs so no more frequent calls for that; you and your property manager learn how to screen tenants better so you don’t have to change tenants so often and many stay for years in your properties. Also, because you are putting your time and effort (call it sweat equity), at the end, the return on investment is potentially higher than with passive investments.

Now, let’s talk about passive investments. This doesn’t require your active participation after you join the investment or operator team. Passive investing is 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. And yes, potentially the return on investment may be lower as you are sharing the profit with other investors but you are saving a lot of time not actively managing these investments, and that is something invaluable.

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.

So, Should You Be an Active or Passive Real Estate Investor? Here are some factors to help you decide which path is right for you.

• If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role. Another active role you can take is doing only renovations in off market properties and sell then right away after repairs are made; something know as flix and flips. Otherwise, if the tenants, toilets and termites make you nauseous, you should go the passive route.
• Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time upfront, during the research phase. Remember when you put your time and effort this usually translates in higher return on investment, when things go well.
• How involved 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? Are you really going to be able to trust on someone else to manage your investment (hard earn money)?
• When you invest actively, 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. I always think however that when you invest actively, your chances to make higher returns are better.
• Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times (if the property is vacant, another repair was just performed or if the tenant is not paying the rent), whereas passive investors only make an initial capital investment. Usually in passive investments; the capital that is initially raised is also used as reserves, so when there are repairs, there is money already available for those unexpected surprises.
• 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. For this you should plan ahead proactively; think about: property insurance, umbrella insurance, forming and LLC putting the property in it. 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 investors.
• 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. Every year I need to shop around for insurance quotes on all my rentals; every year I file a challenge with the tax assessor to decrease my tax liability and every year I am send a bunch of paperwork to my CPA for my rental’s taxes. 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. Every year you receive a K1 document that you send to your CPA, and that’s it! Be aware however; half of the time K1s are delayed and you need to file extensions with your CPA.
• As an active real estate investor, you will need to build your own team, including real estate brokers, lenders, property managers, and contractors; this of course takes a ton of time. 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. You however need also to do your due diligence upfront; making sure that the sponsor and you are a good fit.
• With active investing, you would personally 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. In that case, if there is an emergency in one of your properties you will hope your team responds quickly and effectively. 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. Many sponsors who are part of those teams have vast experience and are doing real estate as a full-time activity.
• As an active investor, you’ll be responsible for the bookkeeping; you’ll have 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 property each year. As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every year for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year.

Conclusion

As a conclusion, active real estate investing can be very rewarding. It requires time and effort however, and you don’t see the results of your efforts immediately, it sometimes takes years. 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 and you have capital to invest, you might want to consider being a passive investor. Finally, you can do a bit of both. I do, I have been investing in real estate for the last 7 years. I still own my single-family rentals and also I invest passively with other investors and we buy together large apartment complexes, we leverage teams that are doing this full time and enjoy our free time with our loved ones.