020: Active vs. Passive: Which is Best for You?
If you’re reading this, we’re assuming you’ve talked to your friends, partner, or family about apartment investing and real estate already. Maybe we’ve got you all hyped about passive income, and its benefits and you’re itching to get started– or you already have‼️
When we were starting out, we were met with a lot of dead-pan looks and “sure, Jan’s” that gave us big eye-roll vibes and conviction to show them all that we were capable.
Think: “Anne Hathaway after those new Chanel boots” moment in 👠 The Devil Wears Prada.
We have definitely evolved since then. And we don’t want to humble brag… But we totally will…
Some people have even called us a genius.
We definitely can’t take all the credit. Because the “genius” portion stems from an old finance term called the “genius zone” which simply means your area of expertise that is generating your active income.
Ya know how everyone likes to make fun of those dancers on Tik Tok? Like, what do they even do? These 15, 16, 17-year-olds are making millions waving their hands and shaking their butts and everyone’s eyes are watching and they are monetizing off of every view. 🤑💰💵
Every expert crafter you see on Etsy who exclusively sells Disney-inspired merch like sweaters, ears, even bath mats?! If the Disney-adults see it, they will buy it.
Musicians and singers who write scores, play in bands, write intro songs for TV-shows. All of these things are considered “genius zones”.
Research from Malcom Gladwelll shows that 10,000 hours is the magic number to achieve true-expertise in anything. And you can have more than one area of genius. But you already knew, that didn’t you?
Our point is this 〰️ Most people just live off of their active income and retire from that and live happily ever after. But, you know us, we simply can’t settle on one thing. To achieve financial freedom early and permanently you want both your active income and passive income working together. ✌️
In this episode ▶️ we’re sharing how our active and passive incomes work together. You could call this our genius zone. Now, we understand there are some of you out there who totally love whatever is bringing you in active income. And to be clear, we love that you’re doing something you’re passionate about! The good news is, you can still be doing whatever that is while still creating cash flow through multifamily apartment investing.
However, for some of you, you fantasize about the day when you can storm into your boss’s office and announce your two weeks notice. We get that, too. If you’re ready to ditch your J.O.B, then now, more than ever, do you need to be generating passive income streams as soon as possible to help fund your expenses and maintain your lifestyle.
So, where do you begin? The first step is to become a sponsor or general partner (GP) who contributes to different aspects of the syndication itself. If you listened to last week’s episode where we talked about the fees general partners procure during the syndication, you’ll see why being a sponsor is the fastest track to getting you to quit that job and make apartment syndication your active income.
You could generate a new source of active income as a sponsor by finding the perfect investment deals, performing due diligence, underwriting the deal, securing the financing, gathering and forming a relationship with the investors, and negotiating with the seller.
And that’s all happening while you’re investing. Because when you put the two together… active income and passive investing you get…
Active investing! 😎😎
Many people 🧡 love this method because it helps them generate active cash flow to fund their passive income stream. By becoming an active investor, you are able to help your fellow investors achieve their financial freedom early and permanently. And there’s nothing like giving back.
Before we get you too hyped on active investing though, let’s look at the whole picture. Becoming a general partner is a lot of time commitment, first in simply just learning the skill to become successful (like at any job) and second in implementing and executing the business plan.
Take it from us, we learned the hard way that attempting two forms of active income simultaneously is almost impossible. You may have heard the phrase “to do two things is to do neither at once”. It’s actually misattributed to the Latin writer, Publilius Syrus, who originally wrote, “Who chases two rabbits catches neither.”
Okay, that’s enough on Latin 101. 😝😝 What we’re trying to say is, whether you’re chasing rabbits or chasing two forms of active income, the result is most likely the same– you’ll end up hungry and empty-handed.
No, no rabbits 🐇 were harmed in the writing of this blog.
We’ll share a little story time with you guys. Back when we were transitioning from the fashion world into real estate investors, quite the career jump, we know. We had our trials and tribulations with trying to do everything at once.
Have our cake, and eat it too, if you will.
🍰 Red velvet cake, more specifically.
Our fashion business had been doing well for many years, but something shifted in 2013 and we started to learn that passive income is the key to long-term financial freedom. We began with the buy-and-hold method of purchasing a single-family home and quickly found out why that wasn’t the ideal way to make an income because it ended up just being like any other JOB. We would get calls from our tenants to fixing plumbing while we were hiking in Patagonia 🏔️ or that garage doors weren’t opening during 🎄 Christmas vacation in Tanzania.
Really put a damper on things during dinner.
Then, in 2017 the push we needed finally happened when we lost one of our biggest fashion clients because they were pushed out of business by a major online retailer. It was definitely blow, but we were forced to double down on our real estate business. So we started tapping into our inner HGTV and flipping homes. Ya know, buying cheap homes that needed work and selling them for a profit.
But that was just another J.O.B. and putting even more of a strain on our fashion business. At this point, we were hanging on for dear life with that side of things. We were forced to focus on one thing at a time.
Looking back, if we had tried to put time and effort into both businesses, both would have suffered and would not have lived up to their potential.
I mean, we’re still very fashionable– we’ll never sacrifice that deeply.
Fortunately, for our financial futures, we picked the right one, multi-family apartment investment. 🙌 Single-family just wasn’t cutting it for us.
Another one of our favorite quotes comes from the critically-acclaimed National Geographic photographer, Steve Uzzell. We’re telling you, we read a lot.
And he said one of the most profound things that we think sums up what we’re trying to say when it comes to passive income while maintaining an active income. “Multitasking is merely the opportunity to screw up more than one thing at a time.”
When you try two things at once, you either can’t or simply won’t do either well. If you think multitasking is an effective way to get more done, you’ve got it all wrong. That’s the most effective way to get less done.
The second and simplest way to start generating passive income is to become a limited partner, also known as an equity partner. Limited partners are also passive investors who invest their money in return for equity in the deal.
As a passive investor, you don’t have to feel the burden of shouldering all the extra time commitments, funding the project, or obtaining the expertise required to create and execute a business plan. And for some of you, this might come as a huge sigh of relief because you truly enjoy your current active income job and can hone in on that genius zone.
Hey, those 10,000 hours aren’t gonna finish themselves. 😉😉
Being a passive investor allows you to create passive income where you can enjoy a passive income stream that grows 🌳 over time.
Say passive one more time.
Simply put 〰️ the opposite of active is passive, and for a lot of us, it’s the active income that is killing us, robbing us of our joy and making us realize more than ever if what we’re doing now isn’t funding the lifestyle we want, and deserve, maybe it’s time to change things.
If you want to accelerate in your genius zone when it comes to multi-family apartment investing, it’s to reinvest your profits back into the apartments. This provides monthly or quarterly cash flow. ✨
When we were starting out, we simply started as passive investors learning the ropes and gaining confidence to underwrite and win the deals, as well as asset, manage the property. Today, we are proud sponsors of many apartment syndication deals and love to build passive income streams where long-term wealth is built via apartment investing.
Everything we do actively will lead to cash flow where we can increase our passive income streams month after month. We love it, even more, when the property goes through full cycles because then you get the big payout, in the end, it’s a bit like hitting the jackpot.
Except it’s a jackpot we rigged to win in our favor without relying on chance. Calculated risk, remember?
Like a schoolyard crush, you never forget your first love, and for us, that was passive investing. It’s the surest way for us to accelerate multiplying our money as quickly as possible to achieve financial freedom. And today, even as active GPs, those early days will always have a soft spot in our hearts, and for the people who choose this route.
The third way to invest in multifamily apartments is through real estate mutual funds or trusts which can be bought and sold like stocks. The REIT, or Real Estate Investment Trust. These guys pay out regular dividends which can be pretty high yield, but as with any stock or mutual fund, there are pros and cons.
Kinda like, ya know, the stock market.
When you invest in a fund, the fund manager has control over which assets they will ultimately buy. The pro is that you spread your investment over the entire portfolio which is typically a safer investment. The con is that you have no control over which specific assets you will be investing in. That’s left in the hands of the fund manager. And like any stock, they can be vulnerable to market volatility.
So for those of you with control issues, we feel ya on why this one might feel a little riskier.
We’re simply the messengers and we are not here to say which of these methods we’ve talked about to start your multifamily apartment investing is the best use of your time or money. I mean, we definitely have our opinions though.
Eventually, you may want to try all three. We simply want you to understand what’s possible and what’s out there! Plus, our goal is to help you make an informed decision about your options when it comes to investing in multifamily apartments. You totally got this. 💪
Consider This: 10 Factors to Help You Decide Passive vs. Active
When it comes to apartment syndication and investing, there are so many routes and paths you can take to get your profit. Some of these are pretty well known, and some may come as a surprise. Take each of these factors into serious consideration while you’re investing, and even before, to get you in the right state of mind. And so you know what you’re fully walking into.
#1: Tenants, Termites, and Toilets
Have you dreamt about becoming a landlord? Does helping people with their plumbing issues and filing noise complaints spark something inside of you? We’re guessing for most of you, this is a no. And this is heavily considered an active investor role.
We mean, there’s nothing more active than solving a termite issue. If the title of the landlord (or, ya know, the actual trash) makes you nauseous, you should consider the more passive income route.
Do you know the difference between an active real estate role and a passive one? While there are several differences, a lot of them have to do with time. Active real estate investments require more time overall during the initial acquisition of the property and then throughout the whole project life cycle. While passive investors only require your time upfront, which is during the research phase of the property.
Only you can determine what you can bring to the table in regards to time, and don’t forget what we just talked about– doing everything results in doing nothing.
If you’ve been here long enough, you know we love to talk about the CIA 〰️ Control Issues Anonymous. We are, regrettably at times, members of that club.
But we have scaled that way back in recent years. Especially with an awesome team, we can trust. But for you– what does that look like? Are you someone who feels the need to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or are you okay with letting someone else handle the details?
And remember it’s passive income not passive-aggressive.
When it comes to active vs. passive investing for profits, a lot of people tend to think one role reaps a higher return in investment. That simply isn’t true. With active investing, you are most likely the owner of the property, so you wouldn’t keep any net profits. With passive investing, the profits are distributed amongst many investors.
Every deal is different, which means whether your role is active or passive doesn’t necessarily guarantee a higher return. There’s no ‘cheating’ the system here depending on which role you take. This is where due diligence and your own evaluation of what you’re willing to bring to the table comes in.
Expenses in active vs. passive investing stay on theme for what’s been discussed so far. Active investors will always take on a more “hands-on” role in expenses, they will be the ones to handle insurance claims, emergencies, and repairs. This also may result in fronting more money at times. Whereas passive investors simply make the initial capital investment and carry on. One and done.
#6: Risk and Liability
We know we talk a lot about “calculated risk” and that’s especially true when it comes to the risk and liability portion of investing, this is one of the most determining factors. For active investors, if anything were to go south on the property, you are personally held liable. This means you may not just lose the property, but also your other assets.
With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong (which, God forbid) the sponsors are held liable, not the passive investors.
If you’re anything like us, the idea of paperwork sends shivers down your spine. But for some of you, there’s nothing like the fresh smell of coffee and a stack full of papers to get you going in the morning. Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchases and rental agreements, bookkeeping, and legal documents throughout the project.
For passive investors though, all you need is one signature on a single PPM (Private Placement Memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.
We’ve talked a lot in previous episodes about the importance of having your squad be people you trust and would drink wine and share a charcuterie board with. Both active and passive investors benefit from strong teams, they just jungle them differently. For those in active investing, you’ll need to build your own team, including bookers, property managers, and contractors.
And those on the passive side will rely heavily on the shared expertise of the existing deal sponsor team. The sponsors are experts in the marketplace and typically already have a team set up to manage the property.
The top three rules in real estate have always been location, location, location. The market everywhere is different, and there is a lot of research to be done beforehand before you invest anywhere. For active investors, they hold the brunt of that work. They would need to be experts in the market and asset class you’re investing in. They would have to research the market, find a “boots on the ground” team, and possibly visit the area.
With passive investing, it’s easy to diversify across different markets since you don’t have to start from scratch with each market.
You are investing with teams that have already taken the time to research those markets.
As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses your apartment has. That’s a lot of transactions. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.
As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year. Definitely one less thing to worry about, and potentially even look forward to, during tax season.
What We’re Saying Is…
There is a lot to consider when it comes to investing in real estate. And even more to think about when you’re an active investor. Only you know what you can handle and what your time limits (or bandwidth!) truly are. If you’re ready to roll up your sleeves and get involved in various aspects of being a landlord, active investing just might be a perfect adventure.
And we are right there with you, cheering you on! 🍾
However, if your time ⏰ is limited, but you have the capital to invest, you might want to take the passive income route. And for all of you ‘third-option’ people, be open to doing more research on turnkey rentals and buy-and-hold stock that may provide some control without a huge time investment.
With all of this rattling in your 🧠 brain, know we are with you 100% of the way. Because you know who always needs to come first? You. So be well, and we will see you back here soon. And if you’re interested in diving into passive investing, be sure to download our free Apartment Syndication Survival Guide!
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