An active investor is one that’s involved to make the money grow. So essentially, you are working for your money. A passive investor is one that invests money and has the money work for them. In this article, we explore these terms further of what it means to be an active and passive investor, and advantages and disadvantages of both.
Active investors have a hands on approach as they are involved in every step of the property transaction. Being an active investor allows you to choose what type of property you want to invest in, your budget, and how the deal is organised. Active investors invest their time and energy into the investment in order to gain a bigger return, which is also known as sweat equity. They do this by adding value to a property whether it be a renovation or development.
Active investors are typically property developers or renovators and want to be as physically involved as possible in the process. Being an active investor has more risk involved, as you are personally responsible for everything. On this note, as you manage 100% of your investment, you also receive 100% of the profits made from it. An advantage of being an active investor is manufacture equity. A disadvantage of being an active investor is that all the work relies on you.
Passive investors make their money work for them, through having someone else managing their investment. The investor isn’t involved in most of the property management process, as they rely on others to look after the investment for them.
Passive investors don’t put any physical effort into the investment that an active investor does. Rather they invest in property developments or homes and earn a return on their investment through rent. Passive investors limit the amount of buying and selling within their portfolios, as they intend to make most of their profit from long term investments, rather than making profit in the short term.
An advantage of being a passive investor is that you can make your money work for you opposed to you working for your money. A disadvantage of passive investing is that you are relying purely on market returns rather than manufacturing growth.
What is the better option, active or passive investing? There is no right or wrong answer here, it all depends on your financial situation and property goals. If you want to be more involved in your investment, being an active investor is the option for you. If you don’t want to be as involved in managing your investment, you can be a passive investor and have someone else manage it for you.