Deciding what kind of real estate investor you want to be is a very personal decision. It comes down to how much time you have to dedicate to your real estate investments and your personal preference. For some real estate investors, it’s about a passion for all things real estate and putting in the sweat equity to find and flip real estate or keep tenants happy. At the other extreme are people who want to build a diversified investment portfolio of which real estate is just a part without ever having to fix a leaky faucet.
Wherever you see yourself on the continuum between these two extremes, the work of acquiring, managing, and making money from real estate exists. The choice to be an active or passive investor is a choice of how much of this work you want to do yourself or how much you want to outsource to a property management company or an investment management company.
The Active Investor
At one end of the continuum is the do-it-yourself investor. Typically, this type of investor starts small. This could be a fix-and-flip investor who buys a rundown house, fixes it up themselves or with the help of a contractor, sells the property for a profit and uses the profits to invest in further properties. It could be a buy-and-hold investor that buys a house or apartment, maybe fixes it up some depending on its condition, and then rents the property to tenants. Rental income should exceed all the expenses of managing the property, with positive cash flow either used to boost the investor’s income or accumulated to purchase the next property and so on.
The active investor does all, or most of, the work themselves. For this reason, they tend to remain small investors, focused on doing their investing as profitably as possible, and building their expertise in all aspects of their chosen method of real estate investing.
The Outsourcing Investor
What happens when an active investor wants to grow their real estate investing business beyond what they can manage themselves? Or what if they want to directly invest in real estate, but don’t want to be doing all the work themselves?
The outsourcing investor makes a conscious choice to outsource most or all of the work to a property management company. Property management companies provide a wide range of services ranging from sourcing tenants, managing rental contracts, to maintenance and repairs of properties. Another variation on this theme is the formerly active investor who, as their investment portfolio grows, sets up their own company and hires employees to take on the day-to-day management of their real estate empire.
The Passive Investor
The passive investor realizes the value of real estate in an investment portfolio and wants to use this asset class to increase their net worth and/or to generate a passive income without actually buying a property or being involved in the specialized tasks of managing those properties. This type of investor is likely to look at paper securities, such as shares in publicly listed real estate companies, real estate-focused mutual funds, and REITs. Other options include investing in property syndications, crowdfunding real estate platforms, hard money lending to other investors, or turnkey investments.
You do you!
There isn’t only one right way to invest in real estate. You get to choose what kind of real estate investor you want to be. For each type of real estate investor, there is a range of real estate investment vehicles available to choose from based on personal interest, investment objectives, and risk appetite.
