The Differences Between Active and Passive Investing in Multifamily Properties

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Active and passive investing are two different approaches to investing in multifamily real estate. Active investing in multifamily real estate involves buying, selling, and managing multifamily properties yourself. This is a hands-on process, and it requires a significant amount of time, energy, and expertise. On the other hand, passive investing in multifamily real estate involves investing in multifamily properties without being directly involved in managing those properties. Passive investing is most often done by investing in a real estate investment trust (REIT) or a multifamily syndication. Having defined both styles of investing, the rest of this post will be spent defining the key aspects of each style of investing. I’ll note that one style is not better than the other, and it’s up to the investor to decide what is best for their lifestyle, personality, and goals.

Active Investing

Active investing in multifamily real estate typically involves a more hands-on role in the acquisition, management, and operation of the property. At JP Acquisitions, we actively invest on behalf of passive investors. In legal terms, our company acts as the general partner (and managing member) of a deal, while our passive investors are limited partners (also known as non-managing members). The following are key aspects that define what it means to actively invest in multifamily real estate:

Active investing in multifamily real estate typically involves a more hands-on role in the acquisition, management, and operation of the property. Here are some key aspects of active investing:

1. Property Acquisition: Active investors identify, evaluate, and acquire multifamily properties themselves. They are directly involved in the process of finding suitable properties, negotiating purchase deals, and securing financing.

2. Property Management: Active investors often take on the responsibility of managing the day-to-day operations of the property, which includes tasks like tenant screening, lease administration, maintenance, and dealing with property-related issues. However, it’s worth noting that even if the investor decides to hire a third-party property management company, they are still actively managing the property. At the end of the day, if the investor is in the position to be making managerial decisions, they are actively investing. This person, company, etc. has the authority and may choose to do things like make property improvements, increase rental rates, and influence the overall strategy.

3. Time and Effort: Active investors spend a considerable amount of time and effort in the management of the property. This approach requires a good deal of real estate knowledge and hands-on experience. At JP Acquisitions, as well as any other syndication firm, our whole business is centered around actively managing passive investor’s money. We are compensated for our time and effort, and in return, we provide investors with all the benefits of investing in multifamily real estate but without the hassle.

Passive Investing

As you can imagine after having read this far into the post, passive investing involves a more hands-off role. Passive investors will rely on the expertise and efforts of other professionals or investment groups to manage the property. Here are some key aspects of passive investing:

1. Limited Involvement: Passive investors are not directly involved in the day-to-day management of the property. Passive investors often participate in multifamily real estate deals through real estate syndications or investment funds. In these arrangements, they provide capital, and the sponsor or syndicator manages the property.

2. Lower Responsibility: Passive investors have less direct responsibility and decision-making power regarding property operations. They rely on the expertise of the professionals they invest with. For sponsors, all of the stress that comes with managing a deal is on them. For every broken toilet, renovation job, eviction, etc., the sponsor has a decision to make that directly impacts the deal.

3. Lower Time Commitment and Risk/Reward: Passive investors typically have lower time commitments and do not need to have extensive real estate knowledge or experience. While passive investors benefit from reduced involvement and risk, they may also see slightly lower returns compared to active investors. However, this varies based on the specific investment and market conditions.

Conclusion

When comparing active investing and passive investing, the line between the two is pretty clear. Active investing requires that the investor makes the managerial decisions as to how the property will be run. Passive investing on the other hand requires less of a commitment.

The best type of investing for you will depend on your individual circumstances and goals. If you have the time, energy, and perserverance to be an active investor, then active investing can be a great way to build wealth. However, if you are looking for a more hands-off approach, then passive investing may be a better option. The following are some things to consider when choosing between active and passive investing:

Time commitment
Willingness to learn to gain expertise
Risk Tolerance
Investment Goals

Both styles of investing in multifamily real estate have their advantages and disadvantages. Many investors choose both routes and whether you choose to do the same or not, what’s important is that you understand what it is you’re getting involved with. It’s never a good idea to make an investment decision without properly weighing the information you have at hand.

If you have any questions regarding the terms and concepts in this post or previous ones, please reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain further. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram (jpacquisitions), or our investor portal to set up a meeting.

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!

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About the Author

Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, investor relations, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, looking for multifamily deals, and working out.

Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.