Picture this: Your bank account is growing steadily, but you’re doing very little to make it happen. In fact, your money is doing all the work, along with a talented investment sponsor.
Active and passive investing are two different approaches to making money through investments, with passive investing allowing gains with minimal effort. Read on for an introduction to this investment type and why it may be right for you.
What Is Active Investing?
Active investors take a hands-on role in creating value with typically limited-time opportunities that require intense daily focus to make money.
Some common active investing options include the following.
- House flipping, where the investor buys, remodels, and sells the house themselves. If they rent out the house, they become a landlord — another active investor type — and handle tenant needs.
- Stock market investing where active investors must pivot in and out of “hot stocks” to turn a fast short-term profit, reading market reports and constantly making moment-by-moment decisions.
Real estate investing requires high-risk tolerance and willingness to make fast investment decisions to avoid missing arising opportunities. It’s intensive, but active investing can deliver a high reward if you’re willing to put in the hours. You find the properties, negotiate with brokers and sellers, and interview property management companies, ensuring that your business plan moves through the proper stages and your investment’s financial details stay on track.
What Is Passive Investing?
At its most basic level, passive investing generates an income stream that reliably provides value with minimal work. It’s a long-haul approach to making money without necessarily having extensive investment knowledge, education, or skill. It requires patience but much less time commitment than active investing.
Passive investing’s premise is always that the invested fund value ideally grows or creates profit without active management or investor work. You choose the venture, go about your life, and remove your money when the time is right or when the project concludes.
One of the most common passive investing options is index funds, a curated stock collection providing broad market exposure and mimicking the market’s overall growth. They often appear in retirement investments because they accumulate significant, long-term gains and have lower overhead as they are not actively managed. Instead, each index fund is a set collection of securities.
Investors can purchase stock in publicly traded companies hoping that those companies produce a profit that returns to investors as dividend payments. This method requires up-front research to select the investment. Then the investor is subject to market whims and how that company performs with bumps in the road.
Real Estate Syndication
Investing in a real estate syndication allows investors to participate in redevelopment projects with much lower capital than if they were to invest independently — and without needing to do redevelopment work themselves. Real estate syndication brings the power of group buying to the world of real estate investing.
In a syndication, a group of investors pools their resources together through a sponsor who manages the work involved in the redevelopment project using their extensive financial and real estate knowledge. They also hire people to manage the project’s ongoing details, like tenant-landlord relations. In this popular form of passive investing, you essentially sit back and wait for returns while your sponsor and your money do the work for you.
Why Pursue Passive Investing?
Passive investors have many motivations, depending on their goals. They may need extra income, to build a savings or retirement plan, or fulfill existing obligations. All passive investors have one common goal: to build wealth with minimal time investment.
To be comfortable with passive investing, you must be willing to give up some level of day-to-day control over the investment itself. Your sponsor manages the deal’s details and is the person who will be hands-on with the project. If you’re the type of person who prefers to be highly involved in your investments, passive investing might not be the ideal fit for you.
To become a successful passive investor, it is helpful but not required to know about investing, financial planning, or real estate. The sponsor brings the intellectual capital needed to launch and maintain the project. For many people, this is attractive and makes passive investment the best fit for them.
What Are the Benefits of Passive Investing?
Passive investing offers countless benefits.
- Stability. Real estate is an attractive asset class with a long track record of outperforming the major stock indices.
- Cashflow. In contrast to other asset types, multifamily real estate generates consistent, predictable monthly income.
- Appreciation. Purchasing properties below replacement-cost positions your portfolio well for future appreciation.
- Tax Impact. Unlike active investing, passive investing rarely involves significant capital gains tax in a single year.
No Time or Effort Commitment
Passive investing is perfect for busy people who need extra income without the extra effort, constant research, or monitoring of active investing. With passive investing, your only time demands are the initial meeting with your sponsor, choosing a project, and receiving periodic investment updates, occurring monthly.
Supplement Income and Build Savings
Passive investing can cover your monthly bills so you can work part-time or be a stay-at-home parent. It also builds your savings, allowing you to start a new business or further your education. For parents, passive investing could create a college tuition fund for your child, cover their medical bills, or take the whole family on a dream vacation. You could even support an aging parent and pay for them to enjoy life in a beautiful retirement community. A passive investor lets their sponsor handle the details, perhaps seeing an investor preferred return of 8% and an average investor return of 21% over the years, like in this example.
Low Capital Entry
Passive investing doesn’t come with an unreachable price tag. Active investing usually involves a more costly up-front investment and continuous money infusions. Although some investments require a large amount of money, like $500,000, you can usually join a lucrative real estate syndication for a minimum $50,000 investment.
Many experts advise spending 90% of your investment capital on passive investing because it is safe and reliable, and putting 10% of your investment capital in active investing, because it is riskier but could yield a high reward.
Cons of Passive Investing
For many people, passive investing is the solution to financial problems, but it does have potential drawbacks.
Passive investing is expected to perform at the same rate as the market. No returns are guaranteed, and the type of passive investing you choose influences possible returns or losses. Any investment carries risk. While we cannot guarantee anything, real estate, particularly multifamily real estate syndication, is proven among the safest investments available.
Lack of Flexibility
Passive investing brings transparency, in that you know exactly what you are purchasing. Conversely, an investor may not be able to snag a deal or other intriguing stock while their assets are involved in their passive investment.
Time to Return
Passive investing shines when you give your investments years to perform. It requires patience and nerve because it can be tempting to pull your money to mitigate further loss when your investment is down. Selling low can be passive investing’s downfall if you do not have the patience or financial means to leave your money undisturbed until you can cash out at a profit.
Start Passive Investing With Real Estate Syndication Today
Life Bridge Capital is a leading real estate syndication company with an impressive history of helping clients like you earn passive income. We offer our investment partners the opportunity to leverage multifamily rental property shares into a passive monthly income. To learn more about our process and passive investing, download our free Guide to Passively Investing in Commercial Real Estate below or view our portfolio.
You can also listen to the Real Estate Syndication Show podcast, which contains helpful information about passive investing. When you’re ready to start your investment journey and enjoy the benefits of passive investing, contact us today to discuss forming an income partnership.