Real estate investors have two main options : Either, to be (1) a passive investor or (2) an active investor. Both have its pros and cons and of course, tax benefits. However, one thing is clear - owning a piece of real estate is definitely the way to make some good income in the long run. Though it may turn out to be a bit complicated, with the right Realtor, you can make it successful.
Active Vs Passive investment
A real estate income is considered passive when the owner of the real estate property do not manage it directly, but rather leave it to a corporation, maintain it in a partnership or even hire a property manager. Several property owners leave it to a system called Real Estate Investment Trust (REIT) where the property manager would handle it.
While being an active real estate investor
1. One main advantage of being an active investor is that the investor gets to choose his properties, hence enjoy more control over what to buy and what not to. With this freedom, you can use your skills to improve the property and thereby enjoy greater returns on it. As a passive investor, you would have to trust the skills of the real estate investment company, because you don’t have much of a say in this.
2. Some active investors flip their properties, so they can make more money out of the property. All they have to do is buy properties that are in dilapidated conditions and do the necessary repairs. They can then sell these properties for good profit, if the market conditions are right. While you entrust this task to professional real estate firm as a passive investor, you don't have to worry about going for a 'fix and flip' strategy or the 'buy and hold' strategy. If there are any unexpected hurdles or challenges, it would be handled by them. Being veterans, their aim would be to make it profitable.
3. A disadvantage with active investment is that it is often not possible for the investor to diversify his investment portfolio like a passive investor. This is because passive investors have the advantage of investing in REITs.
While being passive real estate investor
1. A main advantage is that the passive investor does not have to waste his time managing the property, and worrying about whether he has made a good investment or not. The passive investor can trust his property manager to make a sensible investment and thus expand his portfolio. The day-to-day management of the property would also be handled by the property manager. An active investor would have to do it all by himself, of course, with the help of his realtor, but it could take up a lot of his time.
2. Another advantage with being a passive investor is that you don't have the banks worrying you. As your investment is tied up with a real estate investment company who already has connections with banks, it is their duty to worry about the financing bit (on your behalf). Active investors would have to pay their dues on time or worry about the banks knocking at their door for late payments.
3. With passive investing, you don't have to worry about the future of the investment (the fruits). It would all be done by the firm who has already hired experts to study the ins and outs of the real estate market.
4. Making money when you are not even aware of it
You can make money while you sleep when you are in passive real estate investment. All the transactions and communication can be done online, including signing of documents and transferring of funds; you don't have to travel anywhere for this.
Here comes the real difference...
Nobody can deny that both passive and active investment has its own pros and cons. However, active investment is like having a second job. Most people don't realize it when they make active investments, but flipping or renting out properties or wholesaling them are real JOBS. If you really are passionate about making money through active investments, then by all means, go ahead with it, but it is a full time job and you may have to put up with irritating and sloppy tenants in the process.