In the multifamily real estate investing world, the terms “passive” and “active” are often thrown around, but their true meanings and implications remain widely misunderstood. Many investors believe owning rental properties qualifies as passive investing, only to realize later that it requires significant effort and management responsibilities. On the other hand, aspiring active investors may overestimate their potential earnings without fully grasping the dynamics of the role.
This article details the differing roles of active and passive investors, what it truly means to be a passive investor, and why a multifamily real estate syndication is the ideal option for people interested in passive investing.
What is the Role of an Active Investor?
An active investor in real estate plays a direct role in the procurement and daily operation of an investment property. Essentially, they actively participate in every aspect of managing a project from start to finish.
Some examples of active real estate investing include the following:
- Owning long-term rentals
- Operating a short-term rental with Vrbo and other vacation rental sites
- Flipping homes
- Owning multifamily houses and apartment buildings
As an active investor, you have complete control over every aspect of your investing business, from the type of property you purchase to how you will market it and who you hire to outsource some of the operational tasks. Because you have more control and subsequently more liability, you’re entitled to one hundred percent of the earnings and stand to gain a higher ROI.
Active investing is not cut out for everyone. First, you need to spend copious amounts of time on your investment property. Even if you hire help, you must research, contact, and schedule contractors. That includes firing them when things don’t work.
You will also be responsible for coming up with the funds to make a purchase and handle any upkeep or unforeseen circumstances. This means you will need a healthy amount of cash to keep things running smoothly and sleep well at night.
Even with the amount of time and money you invest, there is never a guarantee that an investment will succeed.
What is the Role of a Limited Partner?
A passive investor is also referred to as a limited partner.
Multifamily real estate syndications are a perfect example of how ‘passive investors’ can be included in the financial benefits of a real estate investment while only having to play a limited role in the process.
As a passive investor, your role is solely financial. This means you do not have to worry about any of the logistics of owning an investment property. Everything from finding and purchasing a property to hiring contractors and managing a property is handled by the syndicator, and you are free to go about your life without any of the headaches.
In a multifamily syndication, a group of passive investors pools their money together to fund a project. The syndicator, or active partner, takes care of all the leg work. While passive investors won’t see as large of an intake as active investors, they can rest easy knowing they don’t hold the same liability and risk.
Just as an active investor can never guarantee success, a certain level of risk is taken with any investment. Passive investors are not an exception to that rule. That is why it is vital for passive investors to align themselves with a syndication they trust and believe in.
Doing your due diligence and educating yourself on what it means to be a passive investor to make an informed decision is not only wise but necessary.
Active Vs. Passive: A Breakdown of the Pros and Cons
Active Investing Pros
- Complete control over decision-making
- You keep one hundred percent of the returns
- Gained knowledge and experience in hands-on real estate investing
- May qualify for real estate professional status (REPS) and additional tax benefits
Passive Investing Pros
- Less responsibility and risk
- It fits in well with a busy lifestyle
- You do not need to be a real estate professional
- Get your foot in the door at a lower rate
- Provided with timelines for when you should see an ROI
- Tax incentives
Active Investing Cons
- Increased liability and responsibility
- More demanding of your time and money
- Dealing with unforeseen events on your own
- If the project is a flop, you have more skin in the game
- Need to become an expert if you aren’t one already
Passive Investing Cons
- The pie is split into more pieces
- Limited control over decision making
- More conservative returns
Why Multifamily Syndications are the Best Option for Passive Investors
If you have decided that passive investing is the best option for you, multifamily syndications are the way to go for a number of reasons.
- You have the support of a team of real estate pros who know their way around all the intricacies of multifamily real estate projects.
- There are great tax benefits to take advantage of.
- You are part-owner of a physical asset.
- Multifamily real estate is a safe bet during economic uncertainty.
- There is little to no impact on your daily life. You simply invest and let the pros work for you.
Taking your first step is the scariest part, but once you educate yourself on your options, you will be able to make an informed decision.
- Active investing is a completely hands-on approach to real estate investing.
- With active investing you take on more liability and responsibility, therefore receiving a higher percentage of revenue when the project becomes profitable.
- Passive investors have a limited role in a real estate project, strictly providing capital and not contributing to the development or management of the project.
- Multifamily real estate syndications are the best option for people who want to get into passive investing.
Want to learn more about investing in multifamily opportunities as a passive investor?
Gimme Shelter Equity aligns itself with reputable multifamily operators in high-growth markets throughout the US. Reach out today and learn more about our exciting opportunities!