Active vs Passive Commercial Real Estate Investor

Active vs Passive Commercial Real Estate Investing: Pros & Cons

When it comes to commercial real estate investing, there are two main strategies: active and passive. Both have their pros and cons, and it can be difficult to decide which is the best option for you. In this blog post, we will discuss if being an Active vs Passive Commercial Real Estate Investor is right for you so that you can make an informed decision about which strategy is best for you!

An active real estate investment is one in which an individual or group of individuals purchase a property directly, giving them complete control over the management decisions. A passive real estate investment entails investors purchasing shares in an LLC that owns the property.

Key Takeaways

  • Active real estate investors have more control over their investments than passive real estate investors do.
  • Passive real estate investing involves choosing an investment that doesn’t require much work to maintain.
  • If you’re looking to invest in commercial real estate, it’s important to understand the difference between active and passive investing strategies so that you can choose one that fits your goals and personality.
Active vs Passive Commercial Real Estate Investor

What Is Passive Commercial Real Estate Investing?

Many people think that you need to buy a property in order to start investing in real estate. However, this simply isn’t true. There are a number of ways to invest in real estate without actually owning any property.

One popular option is to invest in a REIT, or real estate investment trust. This type of investment allows you to pool your money with other investors and then purchase properties through the trust. The properties are then managed by professional property managers, so you don’t have to do any work yourself.

Another option is to invest in crowdfunding opportunities. This type of investment allows you to back a project without actually owning any property yourself. And finally, another option is to invest in real estate funds.

These types of investments allow you to get exposure to the real estate market without actually owning any property. So as you can see, there are a number of ways to start investing in real estate without having to buy a property yourself.

Active Vs. Passive Investing

Active vs. passive investing is a topic that comes up often in the financial world. It’s a debate that can be difficult to understand, but it’s important to know the difference between active and passive investing so you can make an informed decision about the type of investment strategy you want to use.

Risk

It is crucial to understand that both passive and active real estate investment strategies come with risks. In an active approach, the investors who purchase the property are shouldering all of the risks– meaning they could potentially gain more rewards, but if it doesn’t perform well, they will also experience greater losses.

Although passive investors still face some risk, it is spread out across the venture’s general partner and other shareholders. As a result, each individual may experience less of the total risk.

investors prefer, objectives, risk tolerance, time horizon, and return objectives. They consider these to choose the strategy that best fits their needs.

Generally, an active real estate investment strategy is more viable for those with a large amount of investable capital who are looking at the property as a long-term investment and have the time to manage it themselves. The individual would also need relevant skillsets and expertise.

Wealthier individuals who have the money to invest but not the time or expertise to find and purchase commercial property on their own often go for a passive strategy. They leave these responsibilities to experts like private equity firms or REITs.

Control

A person or a group of people purchases a property directly in an active real estate investment. As a result, they have entire authority over day-to-day managerial decisions.

Individual investors purchase shares in an LLC that owns the property in a passive real estate transaction.

The LLC’s corporate form includes a “general partner” who controls the asset, while passive investors, known as “limited partners,” have no say in management choices. They just supply capital.

Individuals should examine their personal demand for control in the deal when picking between active and passive investments.

Skill

Making money off commercial properties by analyzing cash flows and making decisions that will lead to the best return on investment is extremely difficult, so individuals who want to be active investors must have experience reading financial reports as well as knowledge about how to manage a property effectively.

Passive investors do not need to be professionals in the real estate industry; they can instead give their money to people who have made it their career to find, analyze, and take care of commercial properties. Among these individuals are private equity firms – like ours – or real estate investment trusts (REITs).

Passive investors get frequent payments from the rental income generated by the property they invest in.

Before deciding whether to take an active or passive role in their investments, individuals should first assess their ability to understand and manage cash flow.

Time

Active real estate investors can be individuals or professional firms, but both groups must spend a lot of time finding and managing their properties.

With passive investment, you don’t have to worry about putting in a lot of extra hours because that is all taken care of by another party.

When making the decision between an active or passive real estate investment, consider how much duration you’re able to put into it and go with the option that will work better for you.

Passive Commercial Investing: How to Get Started

If you don’t want to actively manage rental properties or lack the experience to do so, passive real estate investing is a much better solution.

Without getting your hands dirty, you can invest in real estate and create passive income streams. There are numerous methods for getting started. Investing in single-family homes, multifamily apartments, and commercial properties such as retail shopping centers, office buildings, industrial warehouses, and other rental assets might help you find rental property opportunities.

Considerations Before Investing in Passive Commercial Real Estate

Investing in passive commercial real estate is a great way to build wealth, but it’s not for everyone. If you’re considering investing in passive commercial real estate, make sure you consider these factors first:

Determine Which Method To Choose

In order to make an informed decision about which type of commercial real estate investment is right for you, there are a number of factors to consider.

Here are some considerations before investing in passive commercial real estate:

1. Consider your goals. What do you want to accomplish with your investment? Are you looking for steady income or large capital gains?

2. Consider the market. What’s happening in that market? Is it growing, stagnant or shrinking? How will that affect the value of my property?

3. Consider the tenants. Who are they, and what do they need from their space? How long have they been there? How likely will they be to stay when my lease is up?

4. Consider the location. Where am I locating this property—what’s nearby, and how close does it get to public transportation and major roads/highways? How much traffic does it generate on a daily basis?

If you’re eager in investing, we have an educational article that will surely help you out, check it out here.

Commercial Basis Metric

A business metric refers to the quantifiable value of a company’s operations. It can be used to measure how well the business is doing and whether it can continue to operate at its current level or if it’s in need of improvement.

Commercial Investment Sponsor

A sponsor is in charge of “identifying, acquiring, managing, and finally disposing of real estate property on behalf of the partnership.” Sponsors control the property, administer day-to-day operations, oversee transactions, solicit funds from investors, and are accountable for the property’s mortgage. Because of the broad scope of duty, it is vital to select a sponsor with genuine experience and a good track record.

Best Commercial Market Get Into

The best commercial market to get into is the one where you have the most expertise.

You might be a great investor and feel like you have all of the tools you need to succeed. You may have even read all of the books or taken all of the courses, but if you don’t know what you’re doing, then it doesn’t matter.

It’s not about getting rich quick or making money on every deal; it’s about understanding your risk tolerance, building relationships with people in your field, and having a consistent plan on how to grow your business.

Properly investing in commercial real estate takes time and research. There are many different types of commercial real estate investments including apartment buildings, office buildings, retail centers, and industrial properties.

Each type has its own risks involved as well as its own rewards so you need to carefully consider what type will work best for your needs before making any purchases or investments at all.

Investing Through Private Equity Real Estate

Real estate assets-related equity and debt holdings can be invested in by endowments and pension funds.

Private equity real estate uses an active management strategy, which takes a diversified procedure to property ownership. GPs invest in many types of properties in different locations; these can include further development and raw land holdings, complete redevelopment of existing properties, or cash flow injections into struggling properties.

Private equity real estate investments are usually controlled by multiple investors. The structure is typically done as limited partnerships (LPs), limited liability companies (LLCs), coordinated investment trusts, private REITs, separate insurer accounts, or other similar legal structures.

Active vs. Passive Investing: Benefits and Risks

Active Investing

Active investing is a technique in which the investor proactively chooses which securities to buy or sell to utilize short-term price changes. To make these decisions, the investor may use various analytical tools, like fundamental analysis, technical analysis, or a mix of both.

Passive Investing

People who take a passive investment approach look to earn money gradually by following market trends instead of trying to predict when the best time to buy or sell stocks is. One benefit this strategy has over others is that it diminishes investors’ chances of making mistakes, as they’re using data to inform their decisions rather than emotional responses to stock prices. 

Active vs passive commercial real estate investor FAQs

Does active investing outperform passive investing?

The answer to this question is almost always a resounding yes.

For long-term investors, passive funds (which track an index) tend to outperform their active counterparts by a wide margin. In fact, in a 20-year period, around 90% of index accounts tracking establishments of all sizes exceeded their active counterparts.

What is one disadvantage of the passive strategy?

One disadvantage of the passive strategy is its lack of adaptability. While the passive strategy is great for long-term investors who want to minimize risk, it can be difficult to use when you need to make a change in your portfolio.

Even if index fund managers believe that their benchmark is going to underperform, they still can’t reduce the number of shares they own.

Is a rental property a passive activity?

In most cases, the IRS classifies owning a rental property and collecting rental income as passive instead of active. This is because real estate is typically used by tenants, and rental income is mainly collected for use of the property.

Why is active investing better than passive investing?

Active strategies usually give investors greater returns in specific investing climates, whereas passive strategies have outperformed others. For example, when the market is unstable or the economy becomes weaker, active managers may start to bring in more profits than usual.

What is an active investor in real estate?

Active real estate investors are those who are directly involved in the process and/or heavily invested in certain parts of it, such as renting or property renovation. Usually, this level of commitment is equal to having a full-time job.

Conclusion

There are a lot of things to consider when you’re trying to decide if active real estate investing or passive real estate investing is right for you. Both have their pros and cons, and the best decision is usually the one that aligns with your goals, experiences, and desired level of involvement. If you’re still not sure which route to take, I can help. Schedule a free consultation with me today. I will help you figure out what option is best suited for you and your unique situation.

Mike Tolj
Mike Tolj

Mike Tolj specializes in representing business owners and landlords in the leasing and sale of commercial properties. He has over 18 years of experience in the industry and knows how to get deals done quickly and efficiently. Mike is passionate about helping business owners and landlords alike achieve their real estate goals. He has a track record of achievement, having completed numerous transactions for his clients.

Tolj Commercial
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