Active vs. Passive Investing: Which One is Right for You?

One of the most powerful wealth-building strategies utilized by savvy investors is to create multiple streams of income. This is how someone, who doesn’t make enough at their day job, can bring in additional money, grow their retirement, or even attain financial freedom. But investing can take many forms, and some are more time-intensive than others.

I grew up around real estate, so after I started working my “day job” launching rockets at the Kennedy Space Center, I decided to purchase my first property.

Over the next 40 plus years, I grew my portfolio to include not only buy-and-hold residential properties but also multi-family, retail offices, industrial warehouses, buildable lots, etc. I’ve even expanded into other alternative investments, such as private lending, tax liens, mortgage notes, and gas and oil rights.

Although getting into real estate was a natural transition for me, many people venture into alternative investments without knowing exactly what they’re getting into.

So, how do you know which alternative investments are right for you? Which asset types typically require more time and effort?

Active vs. Passive Investing

The IRS likes to think of income as either earned or passive. For example, my day job was considered earned income (i.e. you perform a service and pay taxes, including federal, state, local, and sometimes state, as well as social security and Medicare).

Then there’s what the IRS calls “passive income,” which includes royalties, rental income, interest, dividends, and more, on which you would still pay taxes, but you wouldn’t have to pay social security or Medicare.

But there’s more to it. Most types of investments exist on a spectrum of active to passive, and that depends on your role as the investor.

For example, in a syndication, you might raise capital or put a fund together to invest with other people’s money (OPM) and actively invest it.

However, if you invested your capital into a fund and you’re not involved in the day-to-day decisions, you are passively investing. You’re making that return whether you’re on a beach in Puerto Rico or working in a dentist office.

Alternative Investments

Real Estate

Rental properties are passive to some extent. As a landlord, even if you don’t manage or repair the property yourself, you still need to hire a property manager and work with them. It is not a set-it-and-forget-it type of investment. If you invest in commercial properties with triple net leases, this is more passive since the tenant will take care of all the maintenance. Short term or Airbnb rental properties, on the other hand, usually require more involvement from the property owner. Some states are even requiring landlords to acquire business licenses to operate an Airbnb property.

Private Lending

Lending money long term is easier than doing so short term. If you’re lending money every year, you will need to continually find your next borrower. If you’re lending over a thirty-year term, it can be very passive. That said, those loans typically get paid off before the thirty years is up anyway.

Non-performing notes, or defaulted loans, are much more active, as you may need to work with a servicer and attorney to work through the collections and legal process.

Tax Liens

When taxes are owed on a property, that debt can be bought and sold, similar to the sale of promissory notes (i.e. note investing). If you purchase a tax lien as an investment opportunity, you would either collect payment from the property owner or you would pursue the property itself. Tax liens can be relatively passive or active, depending on state rules, regulations, and processes. States like Florida, Texas, and Colorado do much of the work for you, making it a more passive income stream. Maybe you would work on it once or twice a year for a few hours, other than tracking the payments. Plus, in these states, much of the management work can be done online.

Opposite to that are states, such as Illinois, New Jersey, and Pennsylvania, which are more demanding, meaning that an investor may need to dedicate more time for research and follow up.

Tax deed sales are more active than passive because you end up with the property as opposed to the tax lien note making interest.

Stock Dividends

Stocks and bonds can be both active and passive, depending on your style. Long term investing using indices can be passive compared to day trading, where you are evaluating the market continuously. However, there are computer programs that help minimize your time and involvement. I find most investors are always watching and tweaking their programs.

Long term investors typically utilize a “watch and see” approach until big market swings get them looking to buy or sell. With company 401k plans, many investors set it and forget it, hoping that it does well by the time they retire. This hope strategy is passive, but usually ends up with underwhelming results.

Precious Metals

Precious metals is another investment that I believe is on the very passive end of the spectrum, and it is used in times of great uncertainty, such as wartime, significant economic downturns, or even geo-political unrest. It is a way to store wealth and protect it against FIAT currencies. That said, some people do actively trade metals based on the overall price of each type. For example, silver may go up as gold goes down, and it would make sense at that time to trade gold for silver, or even platinum, palladium, or any of the precious metal categories. Gold is traded in 152 countries around the world 24 hours a day, and it’s probably one of the hardest assets to manipulate price for because of its longevity and worldwide presence.

Royalties

Royalties are another passive investment, in most cases. Take the cast of Friends or Seinfeld, for example. They can sell their rights and royalties off to an investor, and then each channel that wants to play either of those shows will pay royalties to the new owner. Another example might be buying royalties to a Beatles song, and then receiving payments from the radio station.

In addition to this list above, there are many other investment opportunities out there, all of which vary between active and passive.

Regardless, there are perks to each investing style. When you’re more active, you often have more control and say so over your investments. On the other hand, when you’re investing passively, you benefit from receiving “mailbox money,” or returns that come to you with less time and effort.

So, which investing style do you prefer? Share below!