Ok, so you figured out you want to start investing in real estate. This is a good thing — real estate is an asset class that’s helped many people around the world grow and protect their wealth. So then, the first step is to buy a property and rent it out to someone, right?

Maybe.

You have just discovered one of the most important questions of investing in real estate, namely:

**Should I invest actively or passively?**

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## Active Investing
_Tenants, toilets, and big upside_

This is likely what most people who are new to real estate think of when they hear “real estate investing.”

Maybe you, the savvy (if new) investor, buy a home and rent it to a nice family. Maybe you buy a property on the beach and rent it out to vacationers on AirBnb or VRBO. Maybe you buy a strip mall and lease space to retail companies!

However, there are a few things to consider before you jump into a project.

### 1. Am I willing to spend time on acquisitions? (Analysis, relationships and deal flow)

The first step to investing right, as my mentor [Gino Barbaro](https://jakeandgino.com/) says, is buying right. Not every property will work for a given business model — very few, in fact.

An active investor’s job is to find the diamond in the rough, whether that’s from a real estate agent or a property off-market. The key relationships one builds with agents and other team members is crucial for success. Once an asset is identified, creating a viable business plan by doing financial and market analysis is key to make sure you have a plan to make money while you hold the asset and once (or if) you decide to sell it.

### 2. Am I willing to do Tenants and Toilets™️?

You’ll forgive me for using a cliche, but Tenants and Toilets is rightfully one of the main concerns aspiring investors have.

Assuming you’re not an aspiring house flipper, renting space for other souls to work or live and raise a family is a big responsibility, and one that comes with a significant amount of headache.

Besides time, a property owner is responsible for many expenses related to the property, including some that are beyond their control. You can definitely outsource some of this work to a property manager (and I recommend it) but that’s another expense you’ll have to account for in your business plan.

### 3. Am I willing to grow (read: fail)?

Part of mastering any area is failure. It’s practically inevitable.

As an active investor, not every investment you make will be a resounding success. Sometimes you’ll fall flat on your face. My first property was by no means a success (a story for another time) and every successful investor has stories of how they’ve failed and used that failure to grow.

**The question for an aspiring active investor is**: can you risk the time, money and stress resulting from those failures?

### The flip side
If you master active real estate investing, there’s very little limit to what you can achieve. However, it’s worth considering the effort that would take before you decide to go this route.

## Passive Investing
_Hands-off mailbox money_

Let’s take the above scenario and flip the script.

What if you, the savvy (if new) investor, decided to use the money you’d spend on an active investment and instead partner with an experienced real estate operator?

You’d still be able to participate in the upside and cash flow of an asset class of your choosing (think multifamily, self storage, residential development, etc) but largely without any of the above concerns of active investment. This option can be extremely attractive for professionals who don’t want to devote a lot of extra time per week to managing their assets.

>Through passive investing, you can generate the same kind of returns you can in active investing, but without the work.

As with anything, though, there are still considerations:

### 1. Am I willing to be hands off?

Passive investment is just that — passive.

As a passive cash partner in a real estate deal, you’re relying on your managing partner(s) to competently manage the asset and execute the business plan. This is why it’s so important to vet operating partners before investing in a deal like this: once the project is underway, you will not be part of most of the decision-making and will not be involved in any day-to-day operations.

For many people, this is a plus! For others who want more involvement, active investing might be a better path.

### 2. Am I willing to give up liquidity during the hold period?

It’s not normally easy to get money out of a passive deal before the business plan is complete, and this could be up to 10 years.

In the worst case as an active investor, you might have to sell a property to take out your equity. In the same situation as a passive investor, you might have to sell _your position_ in the asset to another investor (which is more difficult).

This, also, can be a plus — if there’s less liquidity, pulling your money out at a loss during a market correction is a less likely outcome. Regardless of whether you want to be a passive or active investor, though, I would advise that you plan to keep money in an asset long-term; real estate is a _get-rich-slow_ scheme.

### The flip side
Through passive investing, you can generate the same kind of returns you can in active investing, but **without the work**.

Because the amount of money raised is generally higher in, say, an apartment community acquisition than in a single family rental, you benefit from tax-advantaged strategies, economies of scale, and the experience of an entire team of professionals.

## So which should I do?
That’s ultimately up to you to decide, factoring in your risk tolerance, free time, and goals.

However, as a biased observer, I’ve found that many people default to active investing until they discover the benefits of passive investing.

Regardless of what you choose, though, I would encourage you to take action!

> Education + Action = Results

_Education_ is crucial for your competency as a real estate investor (or in any field), but _action_ is what actually generates results.

I look forward to hearing about your success in real estate!


Active vs. Passive Real Estate Investing

Value add investing is a fairly simple process in theory.

1. Acquire a commercial real estate asset
2. Raise revenues and/or decrease expenses
3. Refinance or sell at a higher value.

**That’s it!**

Here’s how it works:

Suppose you and a partner acquire a lovely apartment community for 1 million dollars. This is a 10 unit property, and each unit rents for $1000 a month. Your expenses per unit are $600 a month, so that makes your Net Operating Income:

> 10 units x $400 a month x 12 months = $48,000.

At a purchase price of 1M, the cap rate at purchase is 4.8%, because:
> 48,000 / 1,000,000 = 4.8%



Your apartment community is cash flowing nicely! But let’s say that in this particular market, you can find a way to increase rents by $50 and decrease expenses by $50 per unit. Now every month, the property is bringing in $500 net of expenses.

Your new Net Operating Income is:

> 10 units x $500 a month x 12 months = $60,000!
 
That’s excellent, because now your cash flow has increased.


However, the real key is in the property’s value with this increase in NOI. How?


Remember how you bought at a 4.8% cap rate? Assuming there aren’t any wild fluctuations in this market, we can assume you’ll be able to sell the property for the same cap rate you bought it.

> $60,000 NOI / 4.8% cap rate = market value of $1.25M!
 
You just created $250,000 of equity just by making the property run more efficiently.

That is the real power of value add investing – forced appreciation (not natural) through successfully implementing a business plan.

Ursa Capital Blog

Active vs. Passive Real Estate Investing

What is Value Add Investing?