In this constantly evolving real-estate investing landscape, a question that continues to dominate among conversations for institutional investors, and fund managers is “What is a better strategy – Active or Passive Investments?”
While both the strategies offer different advantages and challenges, their success depends on factors like investor goals, capital availability, risk tolerance and market trends. Understanding the nuances of each strategy and where they work best plays an important role in smart real estate investing.
What is active real estate investing?
Active real estate investing involves having hands-on participation in the real estate project, from acquisition, management, development, to disposition of the venture. This strategy involves market research, analysis, execution and timing to take advantage of short term shifts. Active investors are directly responsible for the success of the asset that includes leasing, renting, tenant relationship and operational performance.
Some of the common strategies used in active investments are opportunistic or value-add acquisitions, property redevelopment or repositioning, and direct ownership and management projects.
Pros of active real estate investing:
- More control of the project
- Flexibility to adjust to market demands
- Tax advantages via depreciation and deductions
- Direct cash flow
Cons of active real estate investing:
- Operationally demanding
- Increased exposure to market volatility
- Increased risk if execution failed
- Higher costs
- Demands time, expertise and effort.
Active real estate investments are a good fit for individuals with sufficient investable capital with time to manage the asset and its performance and skill and expertise to do it.
What is passive real estate investing?
Passive real estate investments allows investors to allocate their capital through professionally managed vehicles into a project without participating in the daily operational decisions. This strategy aims at buying and holding assets for a diverse portfolio with minimal trading.
Some of the common strategies used for passive real estate investing are public and private REITs, mutual funds and ETFs focused on real estate investments, and crowdfunding platforms.
Pros of passive real estate investing:
- Allows portfolio diversification
- Liquidity (public REITs)
- Access to professional asset management
- Aims at long term growth against market
- Reduced risk
Cons of passive real estate investments:
- Limited control on strategy or property selection
- Lower returns compared to direct investments
- No flexibility to adapt to market changes
- Subject to market sentiment
Passive real estate investments are a good fit for individuals with high income margins who have funds to invest but lack the time or expertise to manage a real estate property. These tasks are outsourced to an expert in the field like private equity firms or REITs.
Which real estate investing strategy yields better returns?
The performance or success of the strategy you use depends on different performance drivers such as
- Return potential – Active investing poses a higher return potential with greater risk than passive investing.
- Risk exposure – Exposure to risk is lower in passive investing than in active investments.
- Control and Flexibility – Active investments provide a greater control of the project and flexibility against changing market conditions.
- Time commitment – Active investing is more than just capital allocation, it includes maintenance, and management of the venture for improved returns.
- Capital requirements – Active investments need a higher capital structure than passive investments.
Choosing the right strategy for real estate investing heavily depends on the investors preferences. Although passive investments are considered better because of their simplicity, lower costs, and prolonged consistent performance, if you have the right skill set and risk appetite active investments could be the right choice for you. A hybrid approach, combining both strategies can also provide a balanced real estate investing experience.
