Active vs Passive Investing
What do you think is a good rate of return on your money? The return should be much different depending on if it's an active or passive investment.
I talk to a lot of real estate investors who use their own money for all of their deals. They tell me their profits and returns they make and most times I find them really unimpressive.
Example... An investor buys a property and fully renovates it in six months. They are all in at $100K and makes $10K profit. That's a 10% return. A 10% return is great for passive investments BUT it is not a great return for an active fix and flip (especially where you are doing all the work). You devote a lot of time, are actively involved in your project and you only made $10K.
Don’t get me wrong—$10K is a lot of money, and in some respects, it is actually a good return for this deal, but not for the person who puts up all the money AND does all the work. If you are putting in the sweat equity, but were leveraging someone else’s capital and you made $10K, you made a good return. And certainly if you were passively involved, $10K is a great return too.
You need to determine if you want to be hands on (active with the deal) or hands off (passive and putting up the funds). In this particular deal, where the investor did the work and put up the money, a 20% rate of return is probably what you should strive for.
To recap, if you are actively involved in a deal, you should be getting a very high rate of return. If you are passively investing, you should be getting a good, stable return (6-10%).