Crystal Caruthers

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Differences between Active and Passive Real Estate Investing

Do you want to be a passive or active investor? That is the question that every real estate investor must ask themselves. There are benefits and drawbacks to both strategies, so it is important to understand the differences before making a decision. In this blog post, we will discuss the pros and cons of passive and active investing, so you can make an informed decision about which strategy is right for you!

What is active and passive investing, and how do they differ?

Active investing is when an investor takes an active role in the management of their investments. This includes making decisions about which properties to buy, how to renovate them, and what tenants to rent them to. Active investors often have a lot of experience in real estate and are comfortable making these types of decisions.

Passive investing is when an investor leaves the day-to-day management of their investments up to someone else. Passive investors typically invest in pre-vetted investment opportunities that have been created by experienced professionals. passive investors do not usually have as much experience in real estate, but they trust that the professionals who created the investment opportunity know what they are doing!

Benefits and Disadvantages of Active Investing

Real estate investors who like the idea of being a landlord may find active real estate investing exactly what they are looking for, or maybe not. Here are some of the benefits and disadvantages of active real estate investing:

Benefits

  • Maximum control over the real estate investment
  • Tax benefits flow directly to the investor
  • Minimum fees since a leasing agent and property manager isn’t being paid

Disadvantages

  • Investors must understand the ins and outs of managing rental property
  • Requires detailed knowledge of the market, including growth trends and landlord-tenant laws
  • Least liquidity because large amounts of capital are tied up in the property down payment
  • Difficult to scale up and diversify a real estate portfolio when every investment is actively managed

What is Passive Investing?

Passive real estate investing occurs when an investor puts capital into an investment such as self-storage but has a third-party who does the majority of the work.

Property managers or sponsors of a private real estate investment will develop and execute the business plan, identify and acquire property that meets the investment criteria, obtain favorable financing, and handle the day-to-day operations of the property.

However, even passive real estate investors need to be active to some degree, such as analyzing the offering memorandum for a crowdfunding or private equity self-storage opportunity and reviewing regular financial performance reports.

Benefits and Disadvantages of Passive Investing

Passive real estate investing can be the perfect match for investors who want to realize the benefits of owning real estate without having to directly manage or own the property. Here are some of the benefits and disadvantages of passive real estate investing:

Benefits

  • Requires minimal knowledge of managing investment real estate
  • Easier to diversify by investing small amounts of capital in multiple projects
  • Access to investment-grade properties that are difficult for smaller investors to purchase on their own
  • Liquidity may also be greater when investing in publicly traded REITs

Disadvantages

  • Much less control over the real estate investment
  • Not all tax benefits may flow directly to the investor
  • More overhead and fees paid to third parties who oversee the investment and share in the profits

Conclusion

Real estate crowdfunding pools money together from a large number of investors to raise capital for high-quality investment projects such as new home developments, mixed-use projects with a combination of residential and commercial space, and special purpose opportunities such as senior living centers or self-storage facilities.

The minimum investment for a real estate crowdfund begins at just $500, though for accredited investors, such as those who invest with Chromis Capital, the minimums are much higher. This makes crowdfunding an attractive option for passive real estate investors seeking to diversify capital across different property types in various markets across the U.S.

Which real estate investment strategy is right for you?

Do you want 
more passive cashflow
?

Hey, I’m Crystal Caruthers. I’m determined to grow real estate portfolios. My only question is, will it be yours?

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About Crystal Caruthers

She is the co-founder of Chromis Capital. She and Steve began aggressively building a single-family rental portfolio using creative real estate. Through the years, they also built up a hard money lending business and their own property management company Today, she focuses on Chromis Capital LLC, bringing her off-market acquisition skills to a new asset class, working with passive investors to help them invest in large multi-family and commercial properties. 

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Do you want 
more passive cashflow
?

Hey, I’m Crystal Caruthers. I’m determined to grow real estate portfolios. My only question is, will it be yours?

Learn More

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