Active vs. Passive Real Estate Investing—Which is Better?
If you have found the PropertyLark Blog, you probably already have some interest in real estate investing. Maybe you are already a successful investor looking to grow your portfolio. Or, maybe you are new to the game. One thing new home buyers want to know is the difference between active vs. passive income.
It’s important to know the difference when owning an investment property and developing your property management plan. It is also very important when it comes to doing your taxes. Passive income and active income are treated differently by the IRS!
Active Real Estate Investing
This is when the property owner is directly involved in the investment process. It is more than just an investment of your capital. You are investing your time and your risk by being fully involved. For some investors, this is a full-time job. If that describes you, you are definitely an active investor.
Now, there are different levels of active investment. You may be involved in every single aspect of the property purchase, renovation, rental management, etc. Or, you may just be heavily involved in certain aspects of the process, such as the purchase or renovation. Active investors can be rental property owners (buy and hold), house flippers (fix and flip), and wholesalers. We do a lot of wholesaling at PropertyLark, where we find houses and create purchase agreements with the sellers. Then, we sell the rights to that property to a buyer in our investment network.
Passive Real Estate Investing
Contrary to active income, passive real estate investment is a method for generating passive income through real estate ownership. There are a few ways this is normally done. The most common example is investing in a real estate investment trust (REIT). It is basically like a mutual fund. You are buying stock in a real estate portfolio that is actively managed by the REIT. You aren’t actively involved, but you are making money from the trust over time.
There are other types of real estate investment funds, through a process typically known as “syndication.” Syndication is when you invest in a real estate deal along with other investors. All the investors share in the risk, but you will have a limited partnership in the investment. A project sponsor will control the active aspects of the investment and then you are paid out your portion of the profits when the time comes (usually when the property is sold, or in monthly installments if it is a rental).
Active vs. Passive Income
Most real estate investors we work with at PropertyLark are active—at least on some level. How active you are may determine your tax liabilities and benefits. As an active investor, it’s a good idea to get your real estate license, set up a proper legal business structure and be able to demonstrate that you (and/or your spouse) are putting in measurable time actively managing the investment. If you are spending time renovating the house or managing a rental, then you should track all your hours and expenses because you will be able to write more off as a passive investor.
As you delve into real estate investment and work to become a successful investor, you should understand key principles like the differences between active vs. passive income. It can help you better define your investment plan, your role(s) in the process, your budget and, of course, your taxes.
You should also consider joining a home buying and real estate investment network like PropertyLark. We can help you get more out of your portfolio and find the best houses for purchase. Fill out the questionnaire on our buyer’s pages to see if you qualify.