You’re here because you want to invest– and you’ve made it to the right spot. Real estate investing is a lucrative and profitable investment. What’s great about it is that there are so many ways to invest. Real estate investors have agency when it comes to choosing real estate investment strategies, degree of involvement, etc. The two umbrella terms that comprise all of the above are active real estate and passive real estate – which produce active income and passive income respectively. So, what’s the difference between active income vs passive income in real estate?
Active Income vs Passive Income in Real Estate: What’s the Difference?
Active Income
“Active income” is rental income that requires you to be – active in a sense. As mentioned, active income comes from active real estate investing. As an active real estate investor, you take on many responsibilities including:
- Looking for a profitable investment property
- Purchasing the property
- Renovating and fixing it (if necessary)
- Renting it out
- Collecting rent
- Tending to tenants’ needs (Yes, this includes late-night phone calls about a leak in the kitchen pipe)
Because of the above, most active investors choose to invest in areas geographically close to them, to make accessibility less of an issue.
What About Passive Income?
Unlike active income, passive income is income a real estate investor receives without having done much work. Obviously, you will not be sitting around if you choose a passive income investment strategy, but you also won’t be running around as much. Most passive investors hire professional property management services to support their investment efforts.
Because of the nature of investing passively, a passive real estate investor can technically invest in another city or even another state. Say you live in the expensive California real estate market; you can opt to passively invest in the Philadelphia real estate market!
Types of Active Income Investments
Between active income vs passive income in real estate, active income usually requires more work and follow up. Here are the top active income investments.
1. Short Term Rentals
Short term rental investments, such as Airbnb, are very profitable investments, judging from the latest Airbnb data available. If you don’t hire professional property management, however, an Airbnb rental property can keep you very busy – from checking online coordination with guests to checking them in and out, cleaning and restocking the property, tending to small needs, to managing guest turnover every other day. It’s called active rental income for a reason – you have to work really hard for it.
Related: How to Invest in Short Term Rentals: Step-by-Step Guide
2. Flipping Properties
This may be the most time and energy-consuming of all. Flipping properties refers to the process of buying an investment property with the goal of fixing it and selling it fast to make a profit. That’s why it’s called a Fix and Flip strategy.
What’s the flipping process like? You find an investment property, repair it, and then find someone to buy it in a few months. To do so, you’ve got to do your research, then follow up with renovations, and then market your property right. Sounds easy when said in a couple of lines, but fix and flips are among the most challenging strategies in real estate.
3. Real Estate Wholesaling
With real estate wholesaling, you act as a middle man between buyers and sellers. What’s in it for you?
One word: profit.
You get an investment property under contract for lower than the fair market value and sell it for higher. The margin of profit is yours, and you’ve matched buyers with sellers. Real estate wholesaling takes a lot of work because you have to be on the continuous hunt for properties and buyers.
Types of Passive Income Investments
It’s important to consider the types of passive investments when weighing out active income vs passive income. Check out these two most common passive income strategies.
1. Traditional Investment (Long Term Rentals)
Investing in rental properties “traditionally” is one form of passive investments. Becoming a landlord of this kind means you will have long-term tenants, who are usually on a 6-month or 12-month lease and paying you monthly passive rental income. So the bulk of your work would be finding the right tenants, collecting rent, and tending to any issues your tenant(s) may have. This type of investment is more passive than short-term property management.
Related: How to Buy Rental Property in 2019: 7 Easy Steps
2. REITs
Real Estate Investment Trusts (REITs) are investment companies in income producing real estate. This includes office buildings, apartment buildings, warehouses, shopping centers, hotels, among other types of investments. Investing in REITs is very similar to buying shares or stocks, and they’re listed similarly. With this type of investment, someone else does most of the work, and you cash in your profits at the end of every period – as passive as it gets.
Related: What Is REIT and Is It a Good Idea to Invest in One?
Active Income vs Passive Income: Which Investment Strategy Is Best for Me?
There are a few factors to keep in mind when choosing a real estate investment strategy, and they all depend on the investor…
Time Commitment
If you have the time, and if you are willing to dedicate it towards your investment, you can be an active real estate investor. If you don’t have the time, you’re better off hiring experts. A mal-managed real estate investment could end up costing you more than it’s making you.
Control and Degree of Involvement
If you’re more hands-on, and if you like to manage and control your investment first hand, active investments are your go-to. However, if you’re more of a hands-off type of real estate investor, you can choose to hire professional property management and leave it to the experts.
Risk Tolerance
If you’re risk-averse, stick to passive forms of investments.
Active investments are usually higher risk investments. Wholesaling and flipping are especially higher risk. At the same time, Finance 101 teaches us that the higher the risk for an investment, the higher the potential return. So if all goes well with your active real estate investments, the potential return is higher than that of a passive real estate investment.
Final Thoughts
When comparing active income vs passive income in real estate, it’s important to weigh the different variables that go into the equation. There’s no single “best investment strategy.” It really all depends on you. Finally, remember that there’s no such thing as a 100% passive investment. You’re going to have to do work if you want to be making money in real estate.
Want to start cutting down the work involved in finding and analyzing investment properties? You should whether you choose to be a passive or active investor. Learn more about how this is possible.