As the real estate market starts to even out after the pandemic, you might be considering whether or not now is the time to enter the commercial real estate market. Or perhaps change how you are currently investing.
In this article, we will go over five factors you should consider when deciding between active vs. passive real estate investment and how these investment styles can result in different outcomes.
What is Passive Real Estate Investing?
Passive real estate investment is as the name suggests, a passive approach to investing in commercial real estate. Investors here will purchase properties and rent them out, with less day-to-day interest or involvement in the property itself.
You might consider passive real estate investments if you want to own the place but do not have to worry about its upkeep.
These properties are typically managed by external property managers so that everything can keep running smoothly. This way tenants get the support they need and passive real estate investors are less involved.
In order to make up for the difference, passive real estate investments hinge on as little effort from the investor as possible for the maintenance.
What is Active Real Estate Investing?
On the other hand, active property investing is much more involved in putting money into real estate. The owner here is much more of a, you guessed it, active participant!
Landlords who own their properties are a great example of active real estate investors as they manage it and collect the monthly rent.
Active real estate investment also includes the development of buildings and renovation. This work can be extremely beneficial to your commercial real estate property and will likely increase the value, however, this work is also time and capital-intensive.
If this work is necessary it would likely be outsourced in order to allow for less involvement with the actual property work itself.
How Do You Choose Between the Two Options?
Keep in mind that one sort of investment is not better than the other, and we want to offer a brief guide on the two investment styles. Both can be profitable, but it is up to you to determine which is most fitting to your lifestyle.
In this section, we will go over the five factors that will hopefully help you decide which type of real estate investor you want to be – passive or active.
How much do you want to be involved?
We’re talking about active vs. passive rental income here. If you have the time to be an active participant in the upkeep and maintenance of your commercial real estate properties, you may be okay with the responsibilities of active real estate investment.
If you want to be an active participant but don’t want to spend your time maintaining it. In that case, you might be okay with outsourcing these responsibilities to a best-in-class commercial real estate operator like Belvoir Real Estate Group.
So if you do not have the time to spare, you may rethink this method by virtue of being too busy with the upkeep of your commercial investment property.
Maintenance, supervision, and care of your tenants are important, and skipping out on these responsibilities is sure to create problems and trouble for your investments.
Are you willing to spend some extra money?
The best passive real estate investments are not commercial properties that you leave entirely unmanned.
While maintaining any commercial property costs extra funds, hiring a business manager can increase your startup costs to levels you may not have considered.
The best way to determine the cost of hiring a commercial property business manager is to ask your potential candidates for an estimate. Get at least three quotes and make sure that each one includes a list of the services they will be providing. An experienced commercial property business manager should also be able to develop a systems manual that explains how they operate, how your property management fee is determined, and what happens if you decide to terminate their services.
Here are more tips on what to look for in a good commercial property manager.
How much money do you have for investing?
There are different options that are available when looking into passive real estate investing including crowdfunding opportunities for commercial properties. This is a key difference between active vs passive real estate investing.
Investors who do not have enough money can come together with others to purchase the property and fund it. That monthly income is very attractive to investors who are looking to increase their wealth or create more capital.
How much do you want to make?
Active real estate investing can be more profitable than passive investing as you are in total control of the profits. However, active real estate investing requires a deep understanding of real estate operations and extensive upfront resources – both time and capital.
With passive real estate investment, earnings are received in the form of distributions based on your percentage ownership in the investment and you often leave decisions in the hands of others, such as Belvoir Real Estate Group. Passive real estate investment may be a great option if you are looking to diversify your portfolio from a typical stock/bond portfolio and invest in an alternative asset class, without the day-to-day management of commercial real estate.
How much real estate knowledge do you have?
Investing passively can be a nice way to make some extra cash and put money away for your later years. This can be done without having the full know-how of the business.
You do not need extensive investing knowledge to begin investing passively in real estate. You can put your money in something like a REIT (Real Estate Investment Trust), real estate fund or individual real estate deals without ever having to worry about knowing how to manage an investment property.
Here are some more tips on what to know before buying or investing in a commercial property.
Need Help Making Your Decision?
If you are still trying to decide between active vs passive real estate investing be assured that there is no wrong way to be a commercial real estate investor. Just understand that whichever option you choose, making an investment in commercial real estate is a sound use of your hard-earned money.
If you don’t mind doing the work yourself, active real estate investment might not be a bad option for you. But if putting in less of your time and not having to worry about managing it yourself sounds more appealing, then passive investment may be the better choice.
So if you are still struggling to decide between the two styles, know that we are happy to help! Whether you are interested in hiring a commercial property manager or need more guidance before you start to invest, Belvoir Real Estate Group is here to help!