There’s a lot to learn when you first start thinking about investing in real estate and a lot of decisions to make. One of the very first decisions is whether you want to be an active or passive investor. To decide, you should know what each involves, as well as the pros and cons. Read on to discover which is right for you. 

What is an active investor? 

An active investor is in control of the property or properties and spends a lot of time ensuring everything is running smoothly. They are responsible for: 

• Finding the property 
• Securing financing for the investment 
• Making a business plan 
• Executing the plan 
• Finding and managing the right team members 
• Talking to property managers 
• Managing the risks associated 
• Putting things right when they go wrong 

If you have the required time, the idea of starting a new business excites you, and you want to be involved in every aspect of the day-to-day management of your investments, then being an active investor may suit you. Let’s take a look at the pros and cons of being an active investor: 

Pros of Active Investing 

• You are in full control 
• You know every detail of what’s going wrong or right 
• If you have sufficient resources, you can be the sole investor and receive all income or profit 

Cons of Active Investing 

• You are responsible for everything 
• You need to invest the time to learn what you need to know to make the right decisions 
• You could make costly poor decisions if you don’t have someone experienced to guide you 
• If you’re not available full-time, it can eat up all your spare time 
• You are responsible for building the right team and replacing anyone as necessary 
• If you’re seeking a significant amount of financing from others or institutions, you need to be able to prove why you are a good investment 
• More of the risk typically rests with you 
• Renovation budgets can get out of hand quickly, especially if you don’t have a lot of experience evaluating properties or if you get carried away with the finish of the property 
• If you fail to correctly project your costs, you could end up with a much less healthy profit margin (or even none at all) 

What is a passive investor?

A passive investor (also known as a limited partner) is someone who is happy to invest the money and let someone more experienced take on the day-to-day operations. Limited partners invest their money with someone knowledgeable, such as a multifamily syndicator (often referred to as a sponsor).  

You will see a return on your investment with little-to-no effort from you. You might compare it to investing in the stock market, where you invest your money in a certain company, but don’t have to deal with the day-to-day operations of that company.  However, the difference with multifamily investing is your investment is backed by a solid asset, and often the returns can be better.  

Let’s take a look at the pros and cons: 

Pros of Passive Investing 

• You’re essentially hands-free 
• Your money works for you while you live your life 
• You can diversify through multiple syndications with the same sponsor or multiple 
• Your sponsor is incentivized to make a return
• Typically less personal risk
• Developing a good relationship with a talented sponsor or syndication can result in many profitable investments for you 
• In many cases, you will receive a “preferred return,” which means you’ll receive your return before the syndicator receives their money 
• You’re trusting someone with more expertise rather than depending on your own research 

Cons of Passive Investing 

• You have limited control over the business plan (instead, you choose to invest in one that appeals to you with someone you trust) 
• A high level of trust in your sponsor is required
• You need to be someone who knows how to delegate and let people do their work (ideal for busy business owners, doctors, those who have created and sold companies, CEOs, etc.) because you can’t micromanage your sponsor 

How Much Money Do I Need to Invest? 

If you’re going to actively invest, then that depends entirely on what model you choose. What class property are you looking at? Are you looking at single-family or multifamily properties? In some areas, you can get started for little (a down payment of around $10,000 for a single-family residence) if you are happy to have a large mortgage, though you do need to be aware that you should keep some money aside for emergencies and any periods without a tenant. Do your math meticulously to ensure you have a sound ROI. 

If you’re looking to invest passively, you should look to have $20,000 or more, again, depending on the specific properties, areas, and opportunities you’re considering. Keep in mind different syndicators will have different investment minimums. You won’t need to worry about additional costs, and most syndications aim to offer you a very healthy ROI. Why? Because they want you to invest with them again so they can make you – and them – more money in the future. 

So Which is Right for Me? 

You’re going to need to do your research, regardless of which style of investing appeals to you most. Obviously, if you plan to actively invest, you’re going to have to do even more because you’ll be making every decision. When you’re investing a lot of money, you need to ensure you’re getting it right. 

If you’ve always imagined being an active investor but are worried about the time commitment and making a mistake, starting with passive investing can be a good way to dip your toe and start learning what to look for in the future. 

If active investing doesn’t really interest you, but you’ve been interested in property investing due to the security a physical asset brings, then passive is the perfect choice for you. It can offer you all the benefits of investing in real estate, without the steep learning curve or headaches of managing your own properties. 

The good news is that just about anyone can invest in real estate, but you need to choose the right investment strategy. If you choose to invest actively but realize it’s not for you, changing your mind can be costly, not to mention stressful. Unless you have prior experience working in real estate, passive investing may be the safer bet. Just ensure you work with a syndicator you believe in that is happy to answer all your questions. 

If you’re interested in learning more about investing passively or about our upcoming syndications, please don’t hesitate to contact us. 

Current global events should motivate you to focus on certain pressing questions. Here is one of the most vital questions to consider:

Is my investment portfolio balanced and resilient enough to withstand market volatility or do I need to diversify more fully? 

This article will:

• Give an overview of the importance of diversification
• Encourage you to consider adding real estate investment to your portfolio to add stability
• Explain how you can diversify your investments even within the sphere of real estate

Investment Diversification – An Overview

Why is diversification of your investments so important?

Diversification is one of the best ways to minimize risk. Every investor has different investment goals and it is important to have a clear view of your own, whether it is saving for retirement or for more short-term goals, focusing on your ultimate aims will enable success.

Of course, differing investment goals also means different risk tolerances which will have an impact on your investment portfolio.  Whether your investment goals allow you to tolerate slightly more risk or not, it is important to analyze risk reduction strategies.  Diversification is an excellent way to add stability and reduce risk while not affecting a portfolio’s wealth building capacity.

How does diversification achieve this risk reduction?

This is mainly achieved by ensuring your portfolio is spread across different types of investments that will each react differently to the same event.

The key with diversification is to try to limit the correlation between your investments. Simply investing in more financial assets does not mean better diversification if those assets are strongly related. For example, buying stocks in multiple companies of the same type is risky because a single event may cause all of those stocks to devalue. Due to globalization, asset classes are also becoming more correlated than in the past.

In view of the fact that unexpected events can impact investment, you should certainly consider adding real estate to diversify and stabilize your investment portfolio. This reduces exposure to unsystematic risk by diversifying your investments and ensuring that they are not closely correlated to one another.

See the article, Investing In Real Estate Vs. The Stock Market

Add Stability to Your Portfolio by Investing in Real Estate 

Many investors shy away from diversifying their portfolio with a real estate investment because of their inability to liquidate that investment quickly. In actual fact, it is this illiquid quality of real estate investment that can anchor and stabilize your investment portfolio!

Real estate is a tangible asset and as such for many investors, feels more real. It is an asset that engenders confidence. A great appeal of this type of investment is its stability. For many millions of people, this kind of investment has generated consistent wealth and long-term appreciation. 

Real estate investment provides passive investors with very consistent and stable rental income. Having a home is a vital necessity for all people, and as a result, rental investors are relatively protected even during economic downturns.

As we have seen, your portfolio’s long term resilience lies in diversification across different asset classes.

Due to the different buying and selling dynamics of the private market, private real estate investment benefits from low correlation to the performance of stocks and bonds unlike publicly traded real estate investment trusts aka (REITs). That is why they are great options for diversification against unsystematic risk and are thus considered crucial to a clear strategy for diversification.

Even within the percentage of your portfolio that includes real estate investment we encourage further diversification subsequently reducing risk even further.

Diversification in Your Real Estate Investments

How can you create a diversified real estate investment portfolio?

There are three main areas where we encourage diversification. These are:

1. Geography
2. Asset Class
3. Operator

Geography Diversification

Although the risk is relatively small, having all your real estate investments in one geographic location is like having all your eggs in one basket.

A real estate investment in a certain area affected by extreme weather for example, might typically perform well, but would it be wise to have all of your real estate investments in that one area?

Aside from weather issues, there are economic factors such as one area being heavily dependent on one particular employer or one particular type of employer. 

Although it would likely be wise to invest in that area in certain circumstances, if there is a major issue that affects that one industry or employer than that area might become vulnerable.

For these reasons, it is wise to spread your investments in real estate over a wide and varied geographical area as your portfolio grows.

Asset Class Diversification

When it comes to investing in multifamily properties, certain asset classes perform better in a growing economy while others weather a downturn more effectively.

As your portfolio expands try to diversify as much as possible within the range of risk that you are comfortable with. (Some asset classes such as hotels may be too high risk for your liking.) The goal is for your cash flow/returns to remain consistent.

Operator Diversification

As a passive investor in a multifamily syndication, you are putting trust in the operator of the deal. Since the day to day running of the operation is taken care of by the operator this leaves you free to diversify and invest in multiple syndication deals. By doing so, you will not have 100% of your real estate investment capital with any one operator.

To summarize, advanced diversification affords investors the opportunity to increase return potential and reduce portfolio volatility. This is particularly true when diversifying into real estate investing, when investing across various geographical locations, investing in different asset classes and with more than one operator. While the detail of the diversification is down to you, you can be sure that the more advanced and carefully planned the diversification, the stronger and safer your investment will be!