When it comes to real estate investing, many people think that only billionaires can make high profits.
People actually think that by buying massive houses and reselling them for a higher price, or investing in huge commercial properties, or maybe investing in an old worn out house and turning it into a luxurious dream house, they will be able to be successful real estate investors. However, with this kind of mentality, it’s no surprise that more people aren’t as successful as they wish to be.
In reality, there are tons of different methods and strategies to choose from. However, what’s more important to remember here is that many people fall into the trap of applying other people’s experience in real estate on their own experience. They actually do it without examining their own economic condition and abilities.
In the world of real estate investing, there are many ways to make positive returns. Basically, as an entry level investor, you have two roads: passive and active real estate investing. So, which one is right for you? What are the risks and gains of each path? And which one meets your real estate investing goals better?
Active Real Estate Investing
Active investors usually are the ones who manage their income property investments directly, determine their business plan and decide on which strategy to follow. As an active investor, you can choose who can rent your property and how much you want to charge for rent. You can choose when to hold or sell your property. In other words, you decide how to invest in real estate.
Active investors can still use help from a team of experts like realtors, lawyers, and mortgage brokers to help them throughout the process of finding the best real estate investments. Therefore, it doesn’t mean that it’s a one-man band. You can still build a team to divide responsibilities.
As an active investor, you get to control your investment property however you like. But, you need to keep in mind that it’s a huge time commitment. This means you need to dedicate a lot of time not only in managing the property but to educate yourself and gain knowledge in many different aspects of real estate investment strategies as well as investment property financing methods.
Moreover, even if you decide to hire a team of experts to benefit from their experience, you need to choose them carefully to guarantee a successful investment. Keep in mind, if anything goes wrong all the risks are your responsibility so it can be a little stressful and requires a time investment. Rentals, complaining tenants, plumbing leaks, maintenance, marketing etc… are all yours to handle as an active real estate investor. So yes, it can cause some headaches, as any failure can cause a reduction in your profits.
Passive Real Estate Investing
If you are not very interested in active real estate investing, passive real estate investing is another road. It allows you to participate and profit from investments with less stress and headache. Essentially, it means you don’t hold a direct ownership of an investment property.
Passive real estate investing has many different forms. For example, investing in REITs. It is one of the best investment options as it allows you to put money in real estate investment properties which you might not otherwise have an opportunity to invest in. This might include shopping malls, office buildings, and hotels. You are also able to sell your share whenever you feel like it as it offers more liquidity.
When you’re part of a REIT, you rely on an investment manager to make decisions. He’s responsible for buying and selling in addition to deciding where to invest in real estate. Your part comes only when you decide to sell or buy shares. So basically you let another entity do all the work while you gather your share of profit or loss.
Passive real estate investors count on other professionals to administrate the income property investments to make returns. This means you are exposed to less risk than an active real estate investor. You participate in a ready and proven investment system that had many other fruitful deals in the past. Still, you need to pay attention and keep up with everything that is going on with your real estate investment.
Passive real estate investing requires less money to put into the real estate market than active investing. But, still, there’s a minimum investment that can be different from one place to another. Overall, for a couple of thousand dollars, you can invest in publicly traded REITs online. There are other private offers that need a minimum of $50,000 or a $100,000.
And, of course, passive real estate investing is not confined to REITs only. There are many other investment options such as real estate syndication and turnkey properties.
How to Detect a Profitable Real Estate Investment Opportunity
Making money in real estate is really about choosing the best investment options. However, regardless of which path you choose (active or passive), it all comes down to analysis.
So, in real estate investing, there are two types of vital analysis to perform on an investment property: the real estate market analysis and the investment property analysis.
As for the real estate market analysis, it is all about the external profitability factors such as location. This type of real estate analysis studies the area in which the property is located. Therefore, you will be able to get an overall idea of how profitable the location is. Not only that but also take a further step towards predicting the future real estate market trends for that area.
In contrast, the investment property analysis deals with the internal profitability factors. It comes in the form of estimating the investment potential by calculating the return on investment. Of course, there are many more real estate metrics involved. The cash flow, the rental income, and the capitalization rate are all part of that analysis. So, you might want to learn a bit about the math associated with income property investments.
If you think that this is a bit too overwhelming, then you might want to check our rental property calculator. To read more about this incredible real estate analytics tool, click here!
You can decide which strategy works best for you. But, in the end, many agree that diversification is key to a good portfolio. Mixing both active and passive real estate investing styles can be of great benefit to you. Many experts advise not to put all your eggs in one basket. It’s even possible to expand your investment options within a single investment category. But at the same time, you have to be careful not to get distracted by over 30 investment properties. You do not want to lose control over all of them for the sake of diversification.
After all, you should study your choices well and have enough knowledge to get involved in any investment strategy according to your personal priorities, timeline, and objectives.