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Active or Passive Real Estate Investing

Investing in Real Estate can be approached in two ways, actively or passively. When actively investing in Real Estate you assume the position of landlord and sometimes property manager. Passive investing does not include nearly the same responsibility or time obligations. Passive investing can be done through partnerships or REITs.

Active Real Estate Investing – Takes much more time and can be a career in itself. With the extra time and effort can come great rewards; active real estate investing can often create larger returns on your capital than passive investing. People can either do active investing by developing land, flipping properties, or renting out property. By taking an active role, an investor does have the opportunity to improve the property and therefore raising its value and sell for a larger profit. As an active investor you also have control over which properties you will buy and manage.

The disadvantages to active investing are of course the amount of time and expertise it takes. You are also limited in terms of diversifying your portfolio or taking on large property developments based on the amount of funds you have to spend on investing.

Passive Real Estate Investing – Can be taken on in a number of ways, including partnerships and REITs:

    • Limited Partnership – This was a very popular investment vehicle for passive investing throughout the 1970s and 80s.
    • LLCs and LLPs – Limited liability Companies and Partnerships are a fairly recent creation in most states.
    • REITs – A Real Estate Investment Trust is a corporation with a special tax designation which allows the REIT to avoid paying federal income tax on dividends distributed to shareholders. REITs can provide diversification in multiple asset and economic categories sectors. REITs are available in both traded and non-traded markets. Publicly traded REITS are on major exchanges such as the New York Stock Exchange (NYSE) and can provide liquidity that can trade with daily volatility. Public non-traded REITs which can provide both low volatility and low correlation to the traded stock and bond markets can also provide a definitive exit strategy with income and growth potential.

With passive investments, the investor avoids the headaches and time associated with active real estate investing. Property management is taken care of by the partnership or corporation. This frees up the investors time, which is why it is called passive income.

Passive real estate investing also allows the investor more opportunity to diversify their investment portfolio and spread the risk. With direct investing, the average investor cannot afford to invest in a large number or types of properties. With passive investing this is possible.

Another potential benefit to passive investing is that some forms of investments offer liquidity. Traded REITs for example, are listed on major stock exchanges which makes buying and selling shares possible. Real estate itself is an illiquid asset and cannot always be easily sold for cash.

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