CPI Blog

Active vs Passive Real Estate Investments

by | Jun 8, 2022

Making active and/or passive real estate investments are just two ways by which investors into properties such as multi-family apartments can participate in the real estate sector and enjoy attractive returns.

There are a wide variety of investors such as conservative investors, balanced investors and aggressive investors—with these sub-sets being separated into two main categories, namely “active” and “passive” investors. There is a need to distinguish between types of investors as the return expectations differ between different people and different entities making the investment.

So, let’s have a look at some of the key characteristics and differences between both active and passive investors:

What is active investing?

Fundamentally, active REPE investing involves the protagonist taking a completely hands-on approach to investing. Such active investors are heavily involved in every phase of the transaction, and must constantly monitor and manage the different stages of activity, from:

  • finding investors;
  • securing funding;
  • identification of the asset;
  • research into the relevant property market;
  • negotiation and acquisition;
  • ongoing operations; and, finally;
  • refinancing and/or disposal

Therefore, compared with a passive investor, an active investor may acquire and oversee the property themselves, typically with a property management team, although all major decisions rest with the active investor(s).

What is passive investing?

Being a passive real estate investor is quite the opposite to being an active investor. Once an investor invests capital with the entity sponsoring or promoting the investment opportunity, the next step is to await dividend pay outs and, hopefully, profits once the asset is refinanced or sold.

Passive investors are presented with REPE investment opportunities from active investors, do not have to look for investment opportunities on their own and are not responsible for any of the property’s day-to-day operational management or other issues.

In short, the passive investor provides their capital to the active investor and reaps the investment returns with little to no effort.

Some factors to consider about being an active or passive investor

Before any investor decides to be an active or passive investor, here are some of the key issues to consider:

  • How much risk are you comfortable with?

Actively investing involves greater risk as directly acquiring properties might leave an investor open to market risk, time delay risk or cost overruns, plus risk exposure through defaults on loans or loan guarantees.

In other words, an active investor will have to bear the burden of 100% of any losses or unexpected costs associated with, say, a major repair or maintenance issue or overruns on a renovation budget which not only drastically increases the budget, but results in a negative or, at the best, much lower overall return.

As a passive investor, clearly, there is less exposure to risk and investors will be taking advantage of a proven investment system run by an experienced sponsor with a successful track record. Also, returns have more certainty as not only is the risk spread out across many investors, but a GP/sponsor with a proven track record and a qualified team will be able to mitigate these risks and produce the underwritten investment returns.

In fact, it’s not unusual for the projected returns to be exceeded, as the GP or syndicator may have underwritten the transaction on a conservative basis.

  • What about having control of the investment as an active or passive investor?

This is a very key point for any investor looking to decide whether to be making active or passive real estate investments.

Clearly, as an active investor or deal sponsor, it’s possible to decide which investment strategy to pursue, the type of asset to acquire, the range of renovations to undertake, the quality of tenant to sign-up and the rental rates to charge. In short, the active investor directly controls the business plan.

Passive investing is essentially hassle-free as all of the aforementioned tasks and responsibilities are determined by the GP/syndicator. After the initial investment, a passive investor can simply review the monthly or quarterly project updates and look forward to their dividends, knowing that their capital money is being put to good use by an experienced sponsor.

Of course, giving up control of the investment, means there is heavy reliance on and trust of the sponsor and their team to execute the business plan and perform as promised. However, in most REPE investments there will be an alignment of interests and the sponsor may offer a preferred return, ensuring that the syndicator is financially incentivised to achieve an investment return over and above the preferred return.

  • How much time is available to a passive or active investor to make investments?

Undertaking all of the necessary actions to find, renovate/improve, maintain, operate, refinance and/or sell a multi-family property asset takes an enormous amount of time and effort.

Apart from the above, it’s also necessary to find and vet the various team members required to enable a deal to be closed and execute the strategy. People such as primary loan funders, brokers, property managers, lawyers and accountants will need to be identified and selected. All of which requires experience, a high level of expertise and a huge time investment to implement effectively.

Many passive investors are busy professionals with little time to spare and, so, the fact that such type of investment is largely hassle-free is very appealing. There is no need to be concerned about any of the actions described above. Provided the syndicator/operator and the deal has been carefully studied and vetted, it’s just a case of investing capital and enjoying the benefits until there’s a refinancing or exit/sale.

  • How to find deals as an active or passive investor?

Finding attractive Real Estate Assets deals is a very competitive environment and they may be properties out of town or out of state. It’s necessary to be constantly searching for deals, bearing in mind the key criteria which can make a deal successful or otherwise. The ratio of all deals reviewed compared with the one finally selected as a good, attractive investment opportunity is very low.

Obviously, in passive investing, all these issues are taken care of by the sponsor as passive investors effectively outsource the acquisition process to syndicators who search for and identify quality deals.

Benefits of active investing

An active investor who holds the direct-ownership of an asset will receive most if not all of any profit that the asset generates, trading the higher risk for higher upside potential and greater profits.

Benefits of passive investing

When deciding to make active or passive real estate investments,.passive REPE investing may need a little more explanation. Yet it simply means that investors do not take an active role in acquiring or overseeing assets on a day-to-day basis.

Some of the key benefits of adopting such an investment position are as follows:

  • Diversification of investments

Many investors like to consider investment into various property asset classes but it’s not easy to create a diversified real estate portfolio as an active investor. However, passive investors can greatly diversify their real estate holdings by investing in a real estate syndication where a portion of a larger deal is owned. In such a case, passive investors can choose different asset classes across different geographical locations, thereby enhancing the opportunities for above average returns, but also mitigating risk.

  • Lower risk, utilise expertise

Passive investors are exposed to much lower risk compared to active investors as they are investing into a proven investment project run by experienced general partners or sponsors. Often sponsors will conservatively underwrite deals and continue with such strategy whilst managing and operating the property.

In addition, passive investors have access to expertise of experienced investment sponsors and their teams.

  • Reduced time commitment

Being a hands-off type of investment, passive investing clearly involves less time commitment compared with active investing, leaving investors to carry on with their “day-jobs” or enjoy more leisure time.

Preferred forms of REPE passive investment

  • Multi-family REPE Syndications

Multi-family apartment private equity real estate syndication is one of most popular ways for passive investors to invest, and where it is possible to be 100% passive.

To recap, multi-family REPE situations occur when multiple investors pool funds to acquire multi-family real estate assets. Investors secure an ownership interest in the syndication, supplying the cash (with a loan arranged by the sponsor or GP) needed to secure a deal.

The GP will undertake all other duties and responsibilities, making multi-family real estate syndications superior to other types of passive investment for several reasons.

Active or passive real estate investments into multi-family properties:

  • provides cash flow, capital appreciation and equity growth;
  • allows passive investors to participate in larger-scale deals they may not have been able to afford independently;
  • allows investors to select the type of property they want to invest in, unlike investing in a “blind fund” or a Real Estate Investment Trust (REIT);
  • allows investors to leverage other people’s time and experience in REPE investment;
  • provides passive income distribution;
  • offers tax advantages.
  • Real Estate Funds

A major difference between real estate funds and REPE syndications is that investors invest in real estate funds without knowing the assets the fund is buying. On the other hand, in syndications the asset or opportunity has already been identified, and funds are being raised from investors specifically for such assets.

With real estate funds, the operator raises capital from multiple investors and then uses it to purchase multiple properties; accordingly investors must have belief in the fund managers to manage and execute their business plan.

  • REITs

Real Estate Investment Trusts or REITs are corporations which own commercial real estate. When an investor invests in a REIT, they are purchasing a share in a company which owns a real estate asset(s) and not actually in the real estate itself.

  • Crowdfunding

A “crowdfunded” deal allows a wide variety of investors to pool their money together to purchase real estate assets, usually online.

At CPI Capital we know that both active and passive real estate investment options have positive aspects.

However, active investing needs a much wider variety of skill sets and experience to achieve success in making the right REPE investment—time, access to capital and access to good deals being just three of the pre-requisites

On the other hand, for many of the reasons outlined above passive investment is much easier… and rewarding.

By partnering with a reputable REPE investor and passively investing in multi-family real estate syndications is an excellent way to diversify a real estate investment portfolio and generate passive income with little or no effort… just leave the hard work to the professionals!

Yours sincerely
August Biniaz
CSO, COO, Co-Founder CPI Capital

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