Active vs Passive Investors
Active vs Passive Investors
By Christopher Starr
Quite often I am asked, what is the difference between an Active Investor and a Passive Investor. In this article we will explain the key differences and help anyone that is uncertain make the choice that is right for them.
Active Investors are often the real estate professionals where every day they are out looking for opportunities, building relationships, managing projects, meeting with investors, raising capital, and managing their team. Yes, there are active investors that might live-in a home while renovating it with the purpose of flipping it, and I have spoken with several that enjoy and have profited from this strategy. However, I believe the true active investor is in the real estate investing business daily. Two of the most important roles of an active investor are:
Deal Sourcing & Analysis - Meeting and maintaining key relationships with local professionals such as brokers and property managers, and perhaps marketing to owners directly. Once opportunities are identified that fit the acquisition criteria, they must be analyzed, or underwritten, to work through the numbers and determine if an appropriate return can be achieved.
Meeting with Passive Investors & Raising Capital - The second most important job of an active investor, equal to deal sourcing, is meeting with potential investors that prefer to place their capital passively in real estate rather than manage it on their own.
Passive Investors are the people that have saved some money, or perhaps profited from the sale of a business, and wish to allocate a portion of their capital to real estate. They find a trusted and experienced active investor, or sponsor, to manage the real estate investment for them. Here are three things passive investors should consider.
Time - There is a considerable amount of time to find and analyze potential acquisitions. Then renovating and managing the property until it is sold. The active investor works with a team of professionals to ensure these steps are successfully executed. This offers a huge benefit to the passive investor because they can do the things they love doing, while receiving cash flow and profits without the time commitment.
Risk - Although both passive and active investors have some level of risk, the passive investor’s risk is greatly reduced. The active investor obtains the financing and often must guarantee the loan, which means if the deal fails, they are liable for repaying the loan. A passive investor should be partnering with an experienced active investor with a successful track record and the professional network and infrastructure that helps reduce the overall risk in any deal.
Expertise - If the passive investor is not a real estate professional, sometimes they are, they would have to take the time and spend the money to learn what is needed to actively invest. Even after obtaining the right education, the lenders, investors, and sometimes the seller will require the investor to be experienced, which often means partnering with an experienced, active investor to build a track record of their own. So, becoming an active investor takes a great deal of time in education and experience that the passive investor can rely on by investing with a proven, successful active investor.
Making the decision, Passive or Active!
In summary, there are several things to consider before choosing to be an active or passive investor. For most, it comes down to the desire of being actively involved in the business of real estate investing, or simply placing your capital with a proven, successful active investor and receive passive cash flow and profits.
At IndyCal Capital, we work with both active and passive investors. We will joint venture with partners that might be experts in certain markets, or might bring in a stronger balance sheet on larger transactions. Our passive investors are those that work in other professions and like to have IndyCal manage their capital they’ve allocated for real estate holdings. Passive investors are a key partner to IndyCal and without them we wouldn’t be able to continue to grow our business.
Which type of investor are you? Do you prefer being actively involved in the daily operations? Or, would you rather leave the daily business up to an experienced team of professionals? Share in the comments below!
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