Real estate investors can choose to either be passive or active investors. Active real estate investors actively manage their properties as either landlords or property managers. They may collect rents, be responsible for repairs and maintenance and engage in other operations of the properties. Passive real estate investors do not participate in the direct management of the property. Instead they invest in a partnership, corporation or Real Estate Investment Trust (REIT) and leave the management of the properties up to professional managers. There are advantages and disadvantages to both types of real estate investing.
As an active real estate investor, managing the daily operations of property investments can be quite time consuming and labor intensive. You will need to deal with tenants, repairs, maintenance, improvements and other aspects of managing property. Active property investors also do not have the same opportunities to diversify their real estate investment portfolios to the same degree that a passive investor does investing in real estate investment trusts (REITs).
One advantage to being an active real estate investor is that you select the properties you want to invest in, whereas a passive real estate investor generally leaves that up to professional managers. The big advantage to being an active real estate investor is that you have more control over the properties and can use your time and talents to improve the properties, thereby having the opportunity to earn a greater return than you might as a passive investor. There are various forms of active real estate investment such as renting out property, developing land or flipping properties for quick profits.
A passive real estate investor does not buy and manage the properties directly but rather invests in a real estate partnership, limited liability company (LLC) or real estate investment trust (REIT). The advantage here is that the passive investor does not have to worry about the day to day management of the properties. Another advantage to being a passive real estate investor is liquidity. Real estate itself is an illiquid asset. However many REIT shares are publicly traded, so the investor can sell them for cash, whereas an active real estate investor must sell the property itself. Passive investing also has the benefit of diversification where an investor can invest in a partnership or REIT and have partial ownership in a variety of properties.
The major disadvantage of being a passive real estate investor is lack of control. The passive investor does not actively pick the specific properties to invest in and does not have the opportunity to make direct improvements or add value to the properties through their own efforts. This can result in lower profits than active real estate investing.