Passive Investing or Active Investing: What makes more profit?
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10yActive investing as you call it is not actually investing at all. It is a job. It can be a very high paying job, but it is a job none the less.
Generally Flipping wholesaling and other "active" types of investing will tend to build cash faster. But like I said it is a job.
Buy and hold and other types of passive investing are the way to build wealth long term but do not generate near as much cash in the short term. (By the way, holding SFHs as rentals isn't totally passive. It does take work even with a property manager, I still put it in the passive category)
27 Replies
- Real Estate Professional · Dayton, OH · Member since 2015 · 423 posts · 187 votes10y
One thing is for sure. Wholesaling is not passive investing. Neither is flipping. Both are full time jobs.
If you don't have the time to devote to either to do them well, passive investing is the way to go.
- 10yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Passive...but you usually have to accumulate funds by doing active investing first.
Actually, whichever works best on the deal at the time. Why do you have to choose first?
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes10y
Active investing as you call it is not actually investing at all. It is a job. It can be a very high paying job, but it is a job none the less.
Generally Flipping wholesaling and other "active" types of investing will tend to build cash faster. But like I said it is a job.
Buy and hold and other types of passive investing are the way to build wealth long term but do not generate near as much cash in the short term. (By the way, holding SFHs as rentals isn't totally passive. It does take work even with a property manager, I still put it in the passive category)
Originally posted by @Joe Villeneuve:
Passive...but you usually have to accumulate funds by doing active investing first.
Actually, whichever works best on the deal at the time. Why do you have to choose first?
A primary reason (among a couple others) I'm getting into real estate, is for the wealth. I look at the lifestyles of the tremendously wealthy that have come out of real estate (today its not too hard to become a millionaire if you play it right), big mansions (if you can do what Cardone said, and pay the house off in cash), luxury cars, you know high class living.
I'm not necessarily looking to make it a career, rather one of many sources of income to build up a pretty net worth. As someone who is, lets just say "runs into the possibility of being financially unstable" I'm guessing active investing would be better, or no?
- 10yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Derik S.:
Originally posted by @Joe Villeneuve:
Passive...but you usually have to accumulate funds by doing active investing first.
Actually, whichever works best on the deal at the time. Why do you have to choose first?
A primary reason (among a couple others) I'm getting into real estate, is for the wealth. I look at the lifestyles of the tremendously wealthy that have come out of real estate (today its not too hard to become a millionaire if you play it right), big mansions (if you can do what Cardone said, and pay the house off in cash), luxury cars, you know high class living.
I'm not necessarily looking to make it a career, rather one of many sources of income to build up a pretty net worth. As someone who is, lets just say "runs into the possibility of being financially unstable" I'm guessing active investing would be better, or no?
Define active vs passive...in your words.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
I think that active and passive investments are on a continuum scale. I would put flipping and wholesaling at the most active end of the scale with syndication investment at the most passive end. Everything else including: Buy and hold, turnkey, notes, hard money lender, and tax deeds fall into place inbetween. Those with capital could also be the private money behind those previously mentioned, and would move up the scale toward the most passive investing.
- Real Estate Agent · Austell, GA · Member since 2014 · 232 posts · 74 votes10y
A lot of that depends on what you are starting off with. If you have 500K to buy a 2 million dollar apartment complex, you'll do very well even though you are passive. But in general, if you are like most of us, scratching and clawing your way through each deal in the effort to achieve Financial Freedom, the profit is bigger for active investors.
Originally posted by @Joe Villeneuve:
Originally posted by @Derik S.:
Originally posted by @Joe Villeneuve:
Passive...but you usually have to accumulate funds by doing active investing first.
Actually, whichever works best on the deal at the time. Why do you have to choose first?
A primary reason (among a couple others) I'm getting into real estate, is for the wealth. I look at the lifestyles of the tremendously wealthy that have come out of real estate (today its not too hard to become a millionaire if you play it right), big mansions (if you can do what Cardone said, and pay the house off in cash), luxury cars, you know high class living.
I'm not necessarily looking to make it a career, rather one of many sources of income to build up a pretty net worth. As someone who is, lets just say "runs into the possibility of being financially unstable" I'm guessing active investing would be better, or no?
Define active vs passive...in your words.
I think Jeff summed it up best, but I'll give it a go.
Anything that includes physical labor I consider active investing. So wholesaling and flipping for sure. Of course, even the passive investor can become active if they decide to value add to the property, whether it be a nice coat of paint on the exterior, or new cabinets in the kitchen, to increase the value prior to selling it.
What comes to mind when I think of passive investing, is rental properties.
- 10yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
@Derick S So you are basing your basing your definitions on your physical involvement...not on your cash's physical involvement. That being the case, all of the REI strategies you mentioned are active...especially holding rentals.
Either way, my original answer is the one I'm sticking to. Passive will generate you wealth, active will generate richness.
Income generated from Richness has a shelf life...passive doesn't.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
Originally posted by @Allen Thomas:
A lot of that depends on what you are starting off with. If you have 500K to buy a 2 million dollar apartment complex, you'll do very well even though you are passive. But in general, if you are like most of us, scratching and clawing your way through each deal in the effort to achieve Financial Freedom, the profit is bigger for active investors.
I am in an advisory role helping an investor buy a million dollar property and I am afraid he would vary much disagree that purchasing is a passive investment. A passive investment is where you money does the work while you attend to other business. Asset management is more passive than many other forms of RE investment, but it is not passive investing. Many who had that very thought lost their properties or provided severally distressed properties for the very fortunate investor that purchased it from them.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
Back to the original question of which is more profitable active or passive investing. The answer is it depends. Certainly fix and flips can be very profitable, but don't forget to count hours spend finding and negotiating the deal. Wholesaling as well can take many months for a newbie to start seeing positive number. Investing in MF deals can take months and years before a deal is found. Sometimes investors settle for less than a great deal just to get into a deal. Syndications, private money lending, and working with a hard money lender, in my opinion are the most passive and can be just as lucrative. Again it depends. It also depends how much your time is worth.
- Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes10y
Active vs. Passive is really a question of your time.
Logically, the more time you dedicate to an endeavor, the more return from that endeavor is expected. That being said, active investing, logically would provide you greater wealth (for simplest definition, wealth = most possible money).
Eventually, everyone gets old, and you no longer for physical or mental issues are no longer able to do your job, thus active investing does have a finite limit on it. That is where passive investing takes over, and if the systems are in place, is largely on auto-pilot.
All that being said, just a matter of where you want your most valuable resource, your time, to be dedicated to.
- Real Estate Agent · Austell, GA · Member since 2014 · 232 posts · 74 votes10y
@Jeff Greenberg are you seriously stating that the months searching spent searching for an apt complex automatically make that investment classified as active? I'm sorry, but when compared to the amount of time holding it (with good property management in place) the time spent doing due diligence prior to offer submission and closing is miniscule. Especially when compared to the effort put into each wholesale and/or flip deal.
- 10yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Passive investing for the future would be throwing your money into an IRA, 401k, SOLO 401K, or another retirement option.
For active investing for your retirement that is also diversified from the stock market is of course real estate, and that encompasses buy and holds. Even Grant Cardone talked about getting phone calls about two people deceased in the back of a car, and that's only one example of phone calls he received since he owned property. The property manager, if you go that route and cover the margins for that option will still be calling you when something comes up and needs an answer from the homeowner. As many ways as you slice it, that is still actively working on your investments.
The McKernan Group4.957 Reviews - Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes10y
As Peter alluded, retirement plans are for tax sheltering funds. If you are self-employed at least on a part-time basis then explore the solo 401k as it will allow you to invest in real estate and make high annual contributions--for example, $53K in 2016.
- Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes10y
This is all a question of your True Hourly Wage. I think running the numbers on this is a good exercise for anyone into money and investments. Here's a great article about how to balance frugality and free time from The Simple Dollar:
http://www.thesimpledollar.com/some-thoughts-on-frugality-and-free-time/
Basically, you want to get at what an hour of your time is generally worth. For those of us full-time employed, it's a pretty easy number to get, but there are some critical errors people make. For instance, I could say that "My company bills for my time at $XXX.XX an hour, therefore an hour from me is worth that."
While an hour of my time for a customer is worth that. After taxes, commuting, and the extra (unbilled) hours I do for my company, my true hourly wage is much lower (likely 30-40% of $XXX.XX). My true hourly wage is what I compete my investments against. If actively working on my investments for an hour pays higher than my true hourly wage, then it's a better use of my time. If my true hourly wage is higher, then I should continue that and invest passively and wisely.
It's important to note that this does not take into account happiness or the value of diversification. Diversification is one additional advantage of passive investment. You have multiple sources of income with low correlation (if my real estate investments fail, it has little to no effect on my company). An active flipper / wholesaler has staked all their income on the real estate market and their reputation in that specific market.
I think this The True Hourly Wage is a pretty good measuring stick for what you should be doing. It's why real estate investors with great employment and salaries are most likely best off keeping those jobs and being the passive money partners in deals. People who hate their jobs: flip houses and wholesale.
- Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes10y
I'm a active investor. I originally thought the best skill was to find property and money. The true core skill for active investors is managing people and problems. I have a high tolerance for dealing with people and problems which is why I probably enjoy being in the game everyday.
Franklin - Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Allen Thomas I think the value of you time is address well by @Trevor Ewen. I may distracted some from the original thought. As I said earlier, I am others love to buy from those that think buy and holds and apartment investing is passive. Yes they are higher up on the passive scale and if you have a good property manager it can be very passive. I think the key here is who is active you or your money. "The millionaire next door" addresses the fact that most of the wealthy that he studied spend more time finding ways to grow their money then earning from their businesses or job. These are not necessarily high income people, but still high net worth.
- Real Estate Agent · Austell, GA · Member since 2014 · 232 posts · 74 votes10y
THAT I can agree with.
- Investor · Titusville, PA · Member since 2015 · 298 posts · 150 votes10y
I am not calling anyone out on this. It is merely an observation of mine that some people who will look at passive investment with hyper critical eyes and claim that, because they have to put forth any effort of their own at all, they insist that an otherwise passive investment is actually an active investment. It is my opinion that, in many situations, this criticism is coming from a tendency to be lazy and is evidence that this person might be looking for a "get rich quick scheme" or are looking for a high yield savings account type of financial plan rather than actual investing.
It is easy for anyone to throw money at a so called investment opportunity and lose all of his/her money for lack of doing any investigating, due diligence, or what some might call work. This is what I would consider a distinction between a real investor and a gambler. Whether you are buying real estate, buying precious metals, buying stocks, buying mutual funds, buying companies, or giving someone else an interest bearing loan, the point at which you become an investor verses a gambler is when you are willing to put forth effort in ensuring that you have mitigated risk and taken advantage of all possible profits. If you are unwilling to put forth that effort, go to a casino. If you are willing to put forth that effort, you will soon see that, even with that effort, you can turn nearly any "active" investment into a mostly "passive" investment. The difference being that, with a passive investment, you will most likely have money coming in from the work of others or because of market volatility rather than having the majority of that money being a direct result of your own labor.
An example of this would be when I have a meeting with the manager of the Burger King I own or a meeting with the property manager of my MFRs. I am working very little and am collecting much money because of the work of others. It is leveraging time. Just like with leveraging money with bank loans or hard money loans, it requires a little bit of my time if I want to be successful at it. This is not to say it is an active source of income; it is instead staying on top of a passive source of income.
Example 1a: you flip houses and do all the work yourself - you have a job. = active investment
Example 1b: you flip houses and have a GM organise contractors and a realtor finding the deals and finding buyers. Your office manager sometimes has a question for you. = passive investment
Example 2a: you buy rental units and manage them yourself, doing your own repairs and evictions and application processing. You receive broken toilet calls at 3am. = active investment
Example 2b: you buy rental units and have a good property manager. Every month you see your accounts have more money than the month before. = passive investment
Example 3a: you loan $25,000 to a person you don't know for his investment and do no due diligence. = you are a gambler
Example 3b: you loan $25,000 to a person you have thoroughly vetted, done your due diligence, secured collateral, and have a good lawyer. = passive investment
Example 4a: you put your money in a 401k and hope for the best. = you are a gambler
Example 4b: you buy a company, place competent managers over it, have that manager hire competent staff, and you keep your thumb on everything, having occasional meetings for effective communication on expectations and efficiency. = passive investment
Example 4c: you buy a company and work it yourself. = you bought yourself a job that some call an investment to make themselves feel successful.
It all comes down to whether or not you are willing to put forth any effort at all.
If yes, you have the possibility of having an investment. Active if you are doing all the work; passive if you hire others.
If not, you are a gambler.
So, to your original question, if you are active you limit your effectiveness because you run out of time = less money
If you are passive, you leverage other people's time and can have many irons in the fire at the same time even though you have to do things sometimes = more money
If you are a gambler, you put forth no effort so you unwittingly give your money to others = no money
- Investor · Titusville, PA · Member since 2015 · 298 posts · 150 votes10y
I am not calling anyone out on this. It is merely an observation of mine that some people who will look at passive investment with hyper critical eyes and claim that, because they have to put forth any effort of their own at all, they insist that an otherwise passive investment is actually an active investment. It is my opinion that, in many situations, this criticism is coming from a tendency to be lazy and is evidence that this person might be looking for a "get rich quick scheme" or are looking for a high yield savings account type of financial plan rather than actual investing.
It is easy for anyone to throw money at a so called investment opportunity and lose all of his/her money for lack of doing any investigating, due diligence, or what some might call work. This is what I would consider a distinction between a real investor and a gambler. Whether you are buying real estate, buying precious metals, buying stocks, buying mutual funds, buying companies, or giving someone else an interest bearing loan, the point at which you become an investor verses a gambler is when you are willing to put forth effort in ensuring that you have mitigated risk and taken advantage of all possible profits. If you are unwilling to put forth that effort, go to a casino. If you are willing to put forth that effort, you will soon see that, even with that effort, you can turn nearly any "active" investment into a mostly "passive" investment. The difference being that, with a passive investment, you will most likely have money coming in from the work of others or because of market volatility rather than having the majority of that money being a direct result of your own labor.
An example of this would be when I have a meeting with the manager of the Burger King I own or a meeting with the property manager of my MFRs. I am working very little and am collecting much money because of the work of others. It is leveraging time. Just like with leveraging money with bank loans or hard money loans, it requires a little bit of my time if I want to be successful at it. This is not to say it is an active source of income; it is instead staying on top of a passive source of income.
Example 1a: you flip houses and do all the work yourself - you have a job. = active investment
Example 1b: you flip houses and have a GM organise contractors and a realtor finding the deals and finding buyers. Your office manager sometimes has a question for you. = passive investment
Example 2a: you buy rental units and manage them yourself, doing your own repairs and evictions and application processing. You receive broken toilet calls at 3am. = active investment
Example 2b: you buy rental units and have a good property manager. Every month you see your accounts have more money than the month before. = passive investment
Example 3a: you loan $25,000 to a person you don't know for his investment and do no due diligence. = you are a gambler
Example 3b: you loan $25,000 to a person you have thoroughly vetted, done your due diligence, secured collateral, and have a good lawyer. = passive investment
Example 4a: you put your money in a 401k and hope for the best. = you are a gambler
Example 4b: you buy a company, place competent managers over it, have that manager hire competent staff, and you keep your thumb on everything, having occasional meetings for effective communication on expectations and efficiency. = passive investment
Example 4c: you buy a company and work it yourself. = you bought yourself a job that some call an investment to make themselves feel successful.
It all comes down to whether or not you are willing to put forth any effort at all.
If yes, you have the possibility of having an investment. Active if you are doing all the work; passive if you hire others.
If not, you are a gambler.
So, to your original question, if you are active you limit your effectiveness because you run out of time = less money
If you are passive, you leverage other people's time and can have many irons in the fire at the same time even though you have to do things sometimes = more money
If you are a gambler, you put forth no effort so you unwittingly give your money to others = no money
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Brian Lacey Seriously! Do you really think that the very rich put a lot of labor into a deal. There time is spent finding the deal, doing their due diligence and investing in it. Look at the "Shark Tank". These guys want to leverage their money. Sure they will advise, train, and introduce the people to those that can help, but how much time are they going to spend on it. There job is to get other people to grow their money. There is a lot of pain and labor starting their own business from scratch. They have all done it before. Now they want to jump into a deal that is already started and partially proven. That is where the money is. Use someone elses sweat to leverage your money.
Read the Emyth and that will help clarify what is more lucrative, being the worker bee or the queen bee being pampered.
Of course those that do not have the financial resources may not have the option. Becoming a passive investor and "getting out of the rat race" is a worthy goal. Robert Kiyosaki's game does not have the goal of being an active investor and making it rich.
- Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes10y
@Jeff Greenberg I agree 100% with everything you said. In my mind, as one increases their means, and improves their systems (all of which you're saying), the term active investing now reinvents itself.
Lets take Cuban for example, doing the DD, and spending the time even thinking of an investment is now considered active investing to him.
You said it yourself, that it's a continuous spectrum. No reason to say that these definitions cannot reinvent themselves, as one progresses in their career.
At that level of investing, your time is what really matters because of its finite amount, time spent doing DD on one deal, is time not spent doing DD on another deal. I think its always active to some degree, just the definition shifts.
- Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes10y
@Jeff Greenberg I think we're beating the same drum.
Active investing => Time commitment
Passive Investing => Reaping the rewards of the active investment.
I guess, using my logic, to some degree every deal involves active investing to create itself, then if successful it becomes passive investing. You could even say that depending how successful a deal is judged by its ability to become and remain a passive investment.
Even Cuban, who is only looking at deals that require his attention, has people underneath him, branches if you will of the Cuban tree, that he had to hire, or hired a subordinate, who then hired other subordinates. Cuban still initially put in that time at the beginning to get the ball rolling, which is echoing all of what you said.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Brian Laceyand that is the goal of most investors, to eventually be passive investors and be able to take off for as long as they want and have the money still keep rolling in,
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