As a successful businessperson, you recognize the importance of delegation. It enhances efficiency, increases productivity, and improves time management, allowing you to focus on higher-priority matters. Delegating also utilizes specialists (i.e., the accountant who does your books), reducing the skills you must acquire to get certain things done.
Passive investing, particularly alternative investments such as real estate, can provide a way to delegate investment decisions to field experts without sacrificing returns.
Understanding the Distinctions Between Active and Passive Investing?
Experts often argue whether it’s better to rely on active or passive investments. The right answer for you largely depends on the type of investment in question and your long-term goals.
Here are the basics:
Active Investing requires active participation and takes a more hands-on approach. Traditional investments like stock and bond funds utilize portfolio managers to make key decisions impacting investment performance. If you actively invest in real estate, you become the portfolio manager.
For example, actively managed mutual funds hire a fund manager who makes buying and selling decisions to beat the stock market’s average return for that category. A real estate active investor must decide which property to purchase, what upgrades to complete, and which property manager to hire. You could also self-manage your portfolio, increasing the time commitment and expertise required.
Passive investing involves investments where others make the buying and selling decisions, along with the day-to-day management. While you give up control over the decision-making, it can be cost-effective.
Index funds are an example of a traditional passive investment. Index funds use algorithms to decide when to buy and sell, mimicking a particular index. With no active manager, you typically pay less than 1% in fees, reducing costs while giving you returns similar to the index it follows.
Real estate also offers passive investment opportunities through market syndications. Instead of purchasing individual properties, you can participate in larger deals and take advantage of the expertise of a management group or sponsor. The sponsor locates properties meeting their investment objectives. The team deals with all the intricacies of buying and managing the property while you enjoy above-average returns.
Benefits of Passive Investing in Real Estate
A few of the most important benefits of passive real estate investing include the following:
- Increased buying power: Market syndication allows you to participate in multi-million dollar deals you could not afford on your own.
- Use of leveraging: Syndications raise capital from investors and borrow money from lending institutions to facilitate the purchase. They leverage the asset with loans to increase buying power and expand your portfolio faster than traditional investing.
- Diversify your portfolio: Stock market diversification spreads risk across various asset classes. Commercial real estate adds depth to your diversification and can reduce overall portfolio risk because real estate does not tend to follow stock market trends.
- Increased returns: Commercial property delivers returns from market appreciation, capitalizing on rising prices in the regional market. The general managers can also force appreciation by increasing the efficiency of operations and through capital improvements.
- Tax efficiency: Real estate can be tax-efficient when you utilize tax strategies. Tax write-offs and depreciation lower taxable income, and using a 1031 exchange can delay taxation on profits.
Sophisticated investors realize real estate can increase diversification and returns. However, many are turned off by the time-consuming process of identifying appropriate properties, arranging financing, and property management obligations. Passive investing, through syndications, can give you the benefits of real estate ownership without the time commitment.
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This article does not offer legal or accounting advice and is only meant for informational purposes. For specific tax questions seek the advice of an industry professional.