In real estate investing, there are two main strategies: directive property investing and passive real estate investing. Both have unique characteristics, advantages, and drawbacks. It's essential that real estate investors understand each type, its key features, and whether the strategies and properties are appropriate for their portfolios, objectives, and circumstances.
Directive property investing
Directive property investing, also called active real estate investing, is a strategy in which the investor is heavily involved in the day-to-day management of the property. Their involvement often includes renovating properties for resale, leasing, and managing it.
Key characteristics
- Hands-on approach: Investors typically handle everything from property acquisition and financing to rehabilitating, tenant management, and property sales.
- Increased control: The investor has direct control over their investments and may receive higher returns through their efforts.
- Significant time commitment: Requires time for management of contractors, maintenance, and leasing
- High risk, high reward: There can be significant upside, but the risks are also higher.
Types of property
- Residential properties: Includes single-family homes, condos, townhouses, and duplexes.
- Commercial properties: Office buildings, retail spaces, and other commercial properties may fall under this category.
- Fix-and-flips: Distressed properties that are purchased, renovated, and sold for profit.
Pros and cons
- Pros: Potential for high returns, total control over the property, and opportunity to increase property value.
- Cons: Requires significant time, skill, and effort; may be high risk, unexpected costs, the unpredictability of the real estate market, and potential difficulties in managing tenants or renovation projects.
Passive real estate investing
Passive real estate investing involves investing in real estate without directly managing it. This strategy may be appropriate for investors who prefer a hands-off approach or lack the time or experience to manage properties directly.
Key characteristics
- Hands-off approach: Passive real estate investors typically invest their money and hire professionals to manage the property on their behalf.
- Less control: Passive investors give up day-to-day control for the convenience of not having to manage their real estate investments.
- May have reduced risk: Less involvement may mean lower risk than directive property investing, but it also may mean lower returns.
Types of property
- Real Estate Investment Trusts (REITs): These companies own or finance income-producing real estate and allow investors to buy shares. The return is typically fixed over a set period.
- Real estate syndications (LPs): A limited partnership that pools capital from investors to acquire, manage, and sell large-scale real estate assets. The general manager oversees the transaction and property for passive investors (limited partners).
- Rental properties: Passive investors can hire property management companies to manage their rental properties.
- Crowdfunding: Private investors contribute money to a larger real estate project and earn returns without managing it.
Pros and cons
- Pros: Less time and effort required, less risk, more diversified investments, and consistent income streams.
- Cons: Returns may be lower than directive investing, less control over the investment, and reliance on others for investment management.
Both directive property and passive real estate investing offer unique opportunities for investors. The suitability of each strategy largely depends on the investor's risk tolerance and real estate knowledge. Selecting an appropriate real estate investment strategy may yield profitable outcomes while also carrying risks. Investors must consult financial, real estate, and tax professionals to determine how the investment affects their tax position, goals, and objectives.
As you research your options, take a look at our real estate checklist to help you determine your next steps. Access the checklist here.
Important Disclosures:
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance
LPL Tracking #1062722
Sources:
https://www.investopedia.com/terms/p/passiveinvesting.asp
https://www.rocketmortgage.com/learn/real-estate-crowdfunding