PASSIVE VS. ACTIVE INVESTING

If you are looking to build wealth using only a minimal amount of capital, you are likely to do so if you are able to structure your investments well. No one tells you how difficult it actually is to look for opportunities that bring the best returns! After all, money doesn’t grow on trees. Your success in growing the hard-earned cash you gathered throughout those years working in corporate America will depend how diligently you follow through with your investment goals and confront certain challenges head on.

One of these challenges is knowing whether to be an active investor or a passive one. You might be thinking, “What does it matter? Just give me the mullah!” Well, making this decision requires you to understand what’s important to you considering many variables based on your personality, including risk tolerance, desire for control, capital available to invest, and your current network. So, let’s take this time to learn the differences between passive investing and active investing to help you make a decision.

First off, active investing is all about control. Every decision you make is crucial as you scout for more profitable opportunities. If you are the type of person who likes the idea of being the designer and executor of your investment strategy, then you will feel right at home with active investors who like to bet for or against the market, depending on the performance of key fundamentals. You’ll be building out your contacts from the start, creating your criteria, and purchasing, rehabbing, and operating the property as an owner, employing your contacts (team) to carry out your plans while you reap the rewards and take full responsibility on all the risks.

As you might imagine, active investing includes tracking, monitoring, and analyzing investments and implementing calculated decisions that should lead to either short-term (flips or wholesaling) or long-term (buy and hold) or both (BRRRR) gains. Active investors want to be where the action is. They are aggressive and relentless in finding deals and opportunities that require lots of work and promise high returns. They also love problem solving and talking with people.

But active investing, for all the benefits it gives, has a few drawbacks. One of these is the amount of risk taken. As market prices and economic conditions fluctuate and move through its market cycle, your strategy needs to adapt with it. What’s more, you might find yourself paying a great deal in terms of fees, closing costs, taxes, and simple good old-fashioned mistakes, leaving you with lower returns than what is initially expected.

Finally, here’s an overview of the pros and cons of active investing:

PROs:

• Full control on criteria and strategy. You get to call the shots.
• Returns do not get split with anyone else.
• You choose when to sell, refinance, or otherwise exit.
• You control your teams and can change them out when you see fit.

CONs:

• The buck stops with you (full responsibility).
• All decisions and work is done by you (time commitment).
• Expanding your portfolio takes high effort, especially when starting out.
• Constantly need to monitor and research and grow networks.

As the term implies, you don’t have to do all the dirty work as a passive investor. To put it simply, you let the investment and the asset ownership team do much of the work in generating profits for you. Compared to active investing, you don’t have to search for profitable stocks and assets to grow your margins. Your work ends with vetting out the operator and asset ownership team and determining whether or not you trust them and/or can see their track record of success. You’re more into finding teams that take down stable long-term investments which generate consistent returns. You just hold on to a single vehicle and let the profits trickle in. Given enough time and consistent investing, the tickles start to form streams, then streams turn into massive rivers of wealth.

Sure, it doesn’t give you that rush of adrenaline when you get under contract on an investment that is passive in nature, but passive investing is a relatively safer strategy for someone without the time, desire, or personality to directly/actively invest. For this reason, passive investing is ideal for first-time investors who would like to start out easy with guaranteed cash flow to “learn the ropes.” Since investments that are passive aren’t meant to exchange hands quickly, investors get to enjoy lower capital gains taxes and depreciation. They also are able to comfortably diversify their portfolios by investing in many asset types and locations.

Then again, passive investing is not without certain drawbacks, like small cash flow or understanding that you are forgiving returns that you could have had if you run an investment portfolio itself. You also don’t have the advantage of adjusting your strategy when the market conditions change, as well as some other things to consider.

Let’s take a look at some pros and cons of passive investing:

PROs:

• Less taxes, fewer worries!
• Diversification in portfolio is much easier.
• Passive growth happens on its own without effort.
• You get to leverage other’s skills / abilities.

CONs:

• Little control of value other than and selling (if that even is an option!)
• Selling or exiting too early can be costly.
• In apartment syndications, you’re bound to leadership teams’ decisions.
• Usually, you pay a premium to a manager to be passive.

Both passive and active investing offer unique advantages. Do you know what kind of person you are? As you were reading the above sections, which one did you find yourself more drawn to or repelled from? If you’re unsure, why not get a little something from each and develop a highly diversified investment portfolio that doesn’t entail too much risk? This’ll allow you to see which one appeals to you more while continuing to build your knowledge, experience, and net worth as an investor.

Indeed, when it comes to investing, you need to have clear objectives in mind. You don’t have to pick which strategy is best right away, so take that pressure off yourself now! Rather, you should create a plan of attack that aligns with your unique personality and, if you have it, your financial goals. It’s always important to take a step back and analyze what you really want to achieve with the amount you are investing, and visualize what it will look like. Are you in it for short-term victories that have potential to produce high yields? Or are you in it for the long haul with a portfolio of equity stakes in high-value real estate investments? Before you get to determine the right strategy to use, you need to refer back to your goals and use these as the basis for your game plan.

A Time for Planning and the Time for Action!

In any event, the time to take action is NOW – whether that looks like building out a strategy, looking for someone to help you with your goals (like an apartment syndicator), reaching out to local contacts for leads, or simply defining your criteria for investing. I keep reiterating over and over again, that preparation is useful only up to certain point, where it then becomes analysis paralysis. You’ve got to take action day by day, no matter how small it is.

What do you think? I’d like to know more about how YOU go about creating an investment strategy. Are you more into selecting the best opportunities every time or are you more into holding assets and see where it goes from there?