Investing can be one of the most significant ways to grow your money.  When it comes to developing your specific investment strategy, you will take a different approach depending on your own set of personal circumstances such as occupation, salary, age, or marital status, just to name a few.  However, no matter what your circumstances, investing is typically categorized as active or passive.  Both aim to provide you an excellent financial return, but each requires varying levels of work from you. 

Whether you are new to investing or an experienced investor, it is essential to understand the difference between the two.  This article takes a closer look at the two and provides some benefits for those looking to invest passively in multifamily real estate. 

If you want specific financial guidance for your particular situation, please consult a professional financial advisor.

Active Investing

Active investing is precisely like it sounds; it includes actively pursuing investments such as stocks, bonds, and real estate.  It requires a hands-on approach that requires consistent monitoring and work on the part of the investor.  To be successful, investors must consistently analyze and reassess different investments that they believe will perform well.  Or, in the case of real estate, they might have to deal with the three “T’s”; tenants, toilets, and termites.  Active investors are typically looking for short-term financial gain.            

Advantages

• Control – You will be able to tailor your portfolio to whatever investment mix you chose and sell whenever you chose (hopefully during favorable market conditions!)
• Short-term gain – If a particular investment has momentum, investors can sell at that opportune time
• Flexibility – Active investing allows for a lot of flexibility in choosing which investments to purchase and sell, but requires thorough research

Disadvantages

• Expensive – Trading fees, investment minimums, and management fees can start to add up and negatively impact your return on investment
• Risk – Active investing can be risky because you are essentially trying to beat or time the market and anticipate fluctuations
• Time  – To be successful, active investing typically requires continuous research, reassessment, and attention

Passive Investing

Passive investing takes a more hands-off approach.  Though it is not truly 100% passive, it is typically an approach for investors who are looking to establish long-term financial returns while minimizing their time investing.  Instead of consistently adjusting your portfolio to meet market conditions, you buy and hold or invest passively with a financial manager or real estate syndicator with the goal of gradual wealth growth.  Timing and exploiting market fluctuations is not the goal of investing passively. Instead, the aim is to earn money by diversifying your portfolio and trading at lower costs.

Advantages

• Costs – annual fees are lower than the fees associated with frequent trading of assets
• Taxes – passive investing typically has lower taxes due to avoiding short-term capital gains taxes
• Time – you can leverage other people (professionals such as a financial manager or syndicators) to manage your investment(s)

Disadvantages

• Illiquidity – when you invest passively, often time your money is locked into whatever fund or investment you select for a minimum period of time
• Risk – Like all investments, passive investments are not immune to fluctuations in the market
• Control ­– Just as active investing allows for more control, the downside of passive investing is less control

Summary

Investing, or having your money work for you, is one of the best ways to build wealth.  No matter if your goal is a short-term gain or saving for retirement, the right investment strategy can improve your financial situation.  However, it is important for you to consider the different types of investments, both active and passive, to determine which works better for your financial goals and level of risk.

Today, many financial experts recommend investment strategies that seek to maximize a portfolio’s return potential while minimizing volatility.  One of the key methods employed is to diversify the portfolio’s assets over a broad range of asset classes with varying levels of risk and return.  For some, portfolio diversification is limited to active and passively investing in the traditional stock/bond/mutual fund portfolio. Still, there is a strong case to be made for the inclusion of investing passively in multifamily real estate. 

Do You Want To Learn More?

RIZE Equity is a private multifamily investment firm.  We work with accredited investors to help them achieve their long-term investment goals through high-quality multifamily investments in the Southeastern U.S.  If you would like to learn more about our investment strategy, we invite you to contact us and schedule a free no-obligation appointment with us.

About the author: Sean Cullen is the founding partner and Director of Operations at RIZE Equity Group LLC, a privately held real estate investment company that helps current/former professional athletes, veterans, and business professionals create generational wealth through smart multifamily investments.