December 05, 2018
Active vs. Passive: Modes of Real Estate Investment
Real estate investors come in two types: those who like to be intricately involved in the minutiae of their investments, and those who prefer to step back, lower their risk, and allow their real estate investment to work for them while they focus their concentration elsewhere.
Those who engage in active real estate investing are usually the type of people who have accrued a great deal of knowledge about real estate, and who are willing to “get their hands dirty.” They must select their properties, obtain financing, personally guarantee any loans, and be involved in the mix of management and delegation of responsibilities for duties regarding their properties.
Two types of active investing include:
- Renting properties—This sort of investor is interested in long-term, ongoing income from their property. But with this comes a whole host of responsibilities and duties. Most jurisdictions in Rhode Island, Massachusetts, and Florida have landlord responsibility regimes. Landlords must collect rent, fix problems that arise in order to maintain habitability, evict in the case it becomes necessary, and keep records on their properties, among other things. This requires a very active relationship with a property.
- House-flipping—This type of investor is more likely to own a property for a short amount of time during which they perform improvements with the hope of gaining income from a sale. The relationship a house-flipper must have with the property is therefore very active. There’s a great deal of negotiation involved, and the investor’s knowledge of the real estate market must be considerable in order to make a profit.
While many who invest passively in real estate do have considerable knowledge of the real estate market, here such a strong grasp on the market as is necessary for active investing is not a requirement. Generally, the actual activity in this form of investing is performed by professionals, while the investors simply provide the capital. Rather than being responsible for the success or failure of the investment—including potentially losing more than they put in, as active investors may—passive investors are usually only responsible up to the amount they initially invested in the property.
There are a number of ways to passively invest in real estate property. The two most common types are:
- Real Estate Investment Trusts (REITs)—These companies make equity or debt investments in real estate, often providing their investors portfolios of real estate investment. Here an investor buys shares in the company, and earns dividends from the profits the company earns through its investments in property—whether the profit is earned by sales or by interest. REITs come in several flavors—private, publicly-traded, and public non-traded—each with its own level of risks and restrictions.
- Private Equity Funds—Generally performed through LLCs, this type of investment model is one in which investors combine their money into a single fund for the purpose of investing. They usually have a manager or a management group, allowing the investors to take a hands-off approach. But it is more important in this type of company to have some level of real estate and financial knowledge than in REITs, because of the usually high cost of minimum investments, and the attendant risks and potential returns on investment.
When taking an active hand in real estate investments, whether in Jacksonville, Florida; Rockport, Massachusetts; or Cumberland, Rhode Island, ensuring clear title to properties serves to mitigate already considerable risks. At Topouzis & Associates, P.C., we perform extensive title searches in these three States, and we provide Owners Policies of Title Insurance so that investors can feel more secure about not finding themselves subject to losing ownership value over properties into which have already been poured significant amounts of time and money. Contact us for more details.