#19 Active vs Passive Real Estate Investing

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now, let's get on with the show. Hey, everyone. Today we're going to be talking about one of my favorite topics, and it's simply talking about the difference between active and passive real estate investing. As you know, I believe, and absolutely believe, that investing in real estate is one of the best ways for physicians to create financial freedom, create other streams of income. And today we're going to be talking about the two major distinctions in real estate. And it's absolutely essential that you understand the difference because there are different characteristics of each that might help you achieve your goals faster, better, depending on what you're looking for. Now, I know what you're thinking. My blog is called Passive Income md. So isn't the whole point that all investing is passive? Well, it's kind of yes and no. I mean, it's all kind of a graded scale. There's a range. It's not all exactly the same amount of active versus passive. However, I believe that all of real estate is, if anything, under the passive income side. The reason I say that is because when we're working in the hospital on our practices, the amount of time that we put in is essentially proportional, most likely to the amount of income that is produced. The difference in real estate is that you're able to leverage your time, your energy, your capital. Yes, in the beginning, it might be a lot of work, and just like any other investment, there is always work upfront. But whether it's putting in sweat equity or putting in time to do the proper due diligence, everything is done up front, but it scales later on. The benefits continue way later than your initial investment of time and energy. And the reason I'm investing in real estate is not because I'm looking for another job. I have that. I'm a physician. I'm an anesthesiologist, and I enjoy what I do, but I don't want my income in my life and how I spend my time to be reliant completely on that. And for any of you who have been in medicine for a while, you know the direction it's headed in. And I absolutely believe that if you are not making changes now in five, 10 years, you're absolutely going to regret not having taken action earlier. Okay, so now we're going to get into the topic of active versus passive real estate investing. For some of you, you might not be familiar with those concepts. Now, the whole concept of real estate investing from this active to passive thing, again, it's not black or white, meaning that there's a continuum. And it's important to know what's on this continuum from active to passive, what it means and what are the different ways to invest. Now the key distinction is that when you are an active investor, what I mean by that is that you are a landlord. It means that you actually own the property, doesn't mean necessarily you manage the property. Now that's another key distinction, but that you actually own it, meaning that you make all the calls for it, your name is on the lease, and you are ultimately responsible for what happens with that property. Now you can make this whole process more active or passive, depending on whether you decide to manage the property yourself. What I mean by managing is the day to day operations. Do the tenants need something fixed? Do you have to collect rent? Are you figuring out all the optimal ways to improve the operations of the actual building on a day to day basis? Now I know some physicians that do manage their own properties. However, personally I believe that everyone, no matter the size of the property, should have property management in place. And the reason I believe that is that I know that your time is way more valuable than getting into the day to day of the property. There are people who do this on a professional basis and have a whole system set up for them so they're more efficient with their time and they make sure they do it correctly. And you can focus on doing what you do best, which is either being a physician, making good income there, or making the big decisions to, to improve your life, your career and set your path. You should be thinking about what other investments to make to again help you accomplish your goals. Not spending time worrying about tenant calls, for plumbing, noise complaints. And if anything, the reason you bought these properties is to have more time to spend with your loved ones doing the things you love. So instead of taking those calls, I would much rather spend time hanging out with my family, going to the park, going to the beach and these kind of things. And that's the whole point of all this. The key is finding good property management. And that is a challenge and it takes time to figure out how to do that. Well, there's so many great resources out there. I know. On my blog I've put resources about some of the questions to ask property management. And that's something that takes a little bit trial and error and takes time. How to figure out how to do well. One of the best things I've learned over time is to actually talk to the people who work with that property management. Don't just rely on online reviews or the website or talking to them. Figure out exactly from people who have actually worked with them to see if their communication is good, whether their properties are performing well, and they're doing everything that they said they would do. Now I'm gonna talk about passive investing, and then we'll go into some of the pros and cons of each. Now, what is considered in the passive real estate investing camp, that's essentially when you're not a landlord, you are investing in other people's deals. You are leveraging their expertise, their time, their manpower, their energy to create returns for yourself. What are some examples of those? This is when you start investing in something called syndications, real estate funds, things called REITs, R E I T, real estate investment trusts. Now, I know the word syndication to some might be totally unfamiliar to me. When I first heard that it's some sort of, like, crime syndicate, and that's where I heard that term in reference to. But really what it is is essentially a pooling of funds to purchase a rental property. Just like if you were going to get together with a bunch of your friends and you wanted to buy an apartment building, you'd be essentially forming a syndication. In this scenario, there are professionals who do this on a high level who go and identify good properties, figure out a good business plan, figure out how the investment will return for people, and raise money for that particular property. That's what typically a syndication is. Now, a real estate fund is typically made up of a basket of syndications, meaning that you go out and you invest in a fund manager or operator, and what they do is with that capital, they just decide to go buy a bunch of these apartment buildings, put that together, and you're able to invest in multiple properties through one investment. And when it comes to REITs, the difference here is that you don't necessarily have ownership of the property itself. You are buying ownership of the company that goes out and buys these properties. It's a slight distinction, but it's almost like owning a stock of the company itself that goes out and buys rental properties, Whereas in a real estate fund, because of your investment, you're owning a share in all of these apartment buildings. Slight distinction, but important to know because it changes some of the tax benefits, the returns, and things like that. But that's a topic for another podcast. Some of you might have also Heard the term crowdfunding, and you might wonder where that plays into all of this. Crowdfunding is kind of a catch all phrase. It's essentially all about access to some of these deals. And what happened in the past was that essentially you needed to know somebody to find out about these syndications, funds. A lot of it was done behind closed doors. It's about who you knew. And the SEC guidelines dictated that to really pitch these investments or to actually promote some of them, you actually need to have a personal connection to the person you're promoting it to. But back in 2012 or so, some of new legislation came about which changed all of that and allowed operators or sponsors to go out and promote on a larger level to do it online, to essentially get funds or investments from the crowd out there. And that's why it's called crowdfunding real estate. And so all it is is access to a lot of the deals that previously you didn't have access to unless you knew somebody. I mean, if you're interested in what some of those platforms look like, I have a great list on my site that you can just look up the best real estate crowdfunding sites. Now let's talk about the pros and cons of active versus passive real estate investing. Let's talk about active investing. One of the benefits of and pros of active investing is the amount of control that you have. You actually own the property so you can make all the major decisions. Do you want to do some rehab, do you want to fix it up, do you want to color a certain color, do you want to change the name of it, do you want to hold onto the property, do you want to sell it? These are all your decisions to make when you actually own the property yourself. And some people relish that control and it's important to them. Now when it comes to some of the taxes as well, some of the greatest tax benefits come from actually owning the property itself. You have some flexibility over how to take some of those tax benefits, whether you want to defer some of those tax benefits, whether you want to exchange that property into another property and take advantage of some of these exchanges and things like that. So you have the most control over all aspects of this investment. The downside of active investing is really the time that it takes to actually take care of this property. You're putting a significant amount of time thinking about it, optimizing it, putting in the work to figure out, hey, what is the best way to run this property to optimize my return? And I Don't want to minimize it. It takes a lot of time. But again, the return potential, the control, is what you gain from having that. Especially if you're a little early on in the investment game, you don't have a lot of experience. But that takes time to learn. And that's one of the benefits of having a property yourself. You get to learn as you own that property. But the downside to that is that you, you may not have the experience to really make this most out of this investment. The burden of knowledge rests completely on your shoulders and definitely the responsibility is there. It's also possible that you might be a little bit more exposed in terms of liability. But making sure you have good asset protection lawyers on your side, making sure you have good structures and insurance will help minimize that risk. Now let's talk about passive real estate investing. One of the greatest benefits is, is the time involved. When you're an active investor, you are in it from day to day, especially in the beginning. Once you hand it off to property management and the property is performing pretty well, you're probably putting a lot less time into it. But it does take some time to position the property and get to that place. When you do passive investing, all of the work is done upfront to figure out, who do I invest with? You should put in the proper due diligence. Learning how to do that appropriately does take time. It does take experience, and it's something that you shouldn't take lightly because once you're in these investments, you're on the ride, typically for the total term and life of the investment. But again, that's concentrated upfront, figuring out how to do that proper due diligence. Because once you invest honestly, all the decisions are out of your hands and really there is no more time commitment expected from you. You just sit back and wait for distributions to occur, and now your time is freed up to do absolutely what you want to do with it. Another thing is that you're able to rest on the experience of others. You're investing in a company or a person or an operator who has hopefully done this and understands how to do this on a high professional level. You're able to leverage their experience for your investment. Some people will say, hey, I'm a physician. I want to do what I do best and create income, and I want to take that money, give it to somebody else and let them do what they do best to work on that investment while I can sit back and let that capital go to work and continue to grow. Some of the downsides to this type of investing is really lack of control. Like I mentioned, once you make that investment, you're basically on the ride for the life of that investment. You don't really get to say what happens with that investment. Do you want it to sell it, do you want to get that money back and that sort of thing, you're pretty much locked in. So when it comes to something called liquidity or being able to quickly convert that investment to cash, that's not really a possibility. You have to be okay with saying that, hey, whether this takes three years, five years, seven years, you're going to just be able to sit and be patient during the life of that investment. And that's an expectation that you need to have on the front side. It's also known that you're going to pay more in the way of fees, and that's because you have somebody else who's managing this investment. But ultimately, are you happy with the return? Are you happy with the amount of time that you put in? Do you also believe because of their expertise, they can get you a greater return than you could potentially get on your own? Now, I've talked to a lot of physicians about this. Do you prefer active investing or passive investing? And I've done a lot of polls in some of my groups, passive income docs, the Facebook group, if you're on that. And what I found through these polls is that one third of physicians prefer to actively invest, to own their own properties, and 2/3 preferably would rather prefer passive investments. And I think that's because physicians feel like they're already strapped for time. They're able to perform at work, at their career, make good incomes, and they would rather have somebody else take that income and let it grow passively. Now, there is a portion, the 1/3 that would rather do it on their own. They want to learn, they want to take advantage, full advantage of some of what those investments can really result in. And they want to put that time energy in upfront, and they're willing to do that. So what do I do? To be honest with you, I do both. I have my own properties as well as I actually invest quite a bit in other people's deals. It kind of depends on what is available to me at the time. I actually like the diversification of having both. That's something that I guess I didn't mention before. But sometimes when you're able to passively invest, you're able to invest 25, 50,000 instead of putting quite a bit more into buying your own properties, you're able to spread your bets a little bit and have multiple investments, especially when you invest in some of these funds. The moment you invest in that fund, you might have 10 to 12 apartment buildings or small shares all across the area, all across the country, in different sections and markets, and have that instant diversification. That's one of the greatest benefits of being able to invest passively. So I like that benefit as well, and so that's why I do some passive investments. But I do like to own some of my own property so that I have the control and, and can decide what I want to do with those investments. So I think it's essential for physicians to actually learn about both sides and utilize both in a way that helps them accomplish their goals. Figure out what you enjoy doing. Do you like rolling up your sleeves, getting in there? But maybe you don't. Maybe you'd rather have that time, you spend that hour in the hospital and you rather get that money going so you can kind of spend that time with your family. It's all up to you. And the only way you can figure it out is to do it on your own and try. So for those who are listening to this, I'm curious what sounds more interesting to you? Do you like the active side? Do you like the passive side? And if you are investing right now, which one do you lean more heavily toward? And I wonder if there's people out there like me who like to do both relatively equally and have found ways to take both of the strengths of both types of investing to really kind of help you achieve your goals. I'm just curious. Would love to hear from you. Have a great week, everyone. Take care. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group PassiveIncome Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.