Passive vs. Active Investing in Real Estate: Pros & Cons of Rentals vs. Syndications

The Big Picture on Passive vs Active Real Estate Investing:

Active real estate investing offers higher potential returns, but it comes with significant responsibilities such as property management, tenant issues, and market research. Investors need to be hands-on and have experience or be willing to learn about managing assets directly to maximize profits.

Passive real estate investing, like REITs or real estate crowdfunding, is ideal for individuals who prefer lower involvement. While it tends to provide more stable and predictable income streams, the downside is that it often comes with less control over investment decisions and potential returns.

Choosing between passive and active real estate investing requires considering a few factors, like how much time you can commit to the strategy, your overall experience in the niche, tax and regulatory responsibilities, capital requirements, and more. 

Chocolate or caramel? Rock or hip hop? Passive or active investing in real estate?

Some investors love buying rental properties directly and owning them in their entirety. Others prefer buying fractional ownership in real estate through group real estate syndications.

We can’t tell you which is “better” because both have pros and cons. But we can break down the pros and cons for you so you can decide whether passive or active investing is better for you.

Passive Vs. Active Real Estate Investing: Key Differences

While quite explanatory, let me explain the difference between passive vs. active real estate investing. 

Passive real estate investing, as they say, lets your money work for you. You find something to invest in and then just rake in the returns. These investments require a little work, mostly in the set-up phase. 

Active real estate investing requires a lot more footwork. Depending on your type of investment, you could be elbow-deep in property management, doing all the required work, or you’re managing and delegating (which still requires work). 

For a better view of the differences, here are what active vs passive real estate investing strategies look like side by side. 

Investment Type
Active Real Estate Investments
Passive Real Estate Investments

Residential Properties
House flipping, managing rental homes
REITs investing in residential properties

Commercial Properties
Managing office buildings or retail spaces
Commercial real estate funds, syndications

Vacation Rentals
Operating Airbnb or short-term rentals
Crowdfunding platforms focused on vacation rentals

Multifamily Units
Managing apartment complexes or duplexes
REITs or syndications focusing on multifamily units

Land Development
Buying and developing land for resale
Land investment partnerships

 

 

Pros & Cons of All Real Estate Investments

Before we compare active versus passive real estate investing, you should understand the advantages — and drawbacks — that most real estate investments share.

Real estate investments typically offer strong cash flow, long-term appreciation, and a fantastic hedge against inflation. One study across 16 countries over 145 years found that real estate generated better returns than stocks, bonds, or any other type of investment.

It also provides outstanding tax advantages, including property depreciation and dozens of real estate tax deductions. Plus, you can defer or avoid capital gains tax on real estate.

For all those upsides, real estate investing has some cons as well.

To begin with, it’s notoriously illiquid: it’s time-consuming and expensive to buy and sell. Compare that to stock investing, where you can click a free button to buy or sell instantly. That makes real estate an inherently long-term investment.

Real estate also costs a lot of money, so you need plenty of Benjamins to invest in. Not everyone has tens of thousands of dollars snoozing in a savings account. While there are ways to invest $1,000 in real estate (or less), those options mark the exception, not the rule.

Finally, there’s a tradeoff between control and convenience in real estate investing. This lies at the heart of what we’ll explore today: deciding whether to be a hands-on or passive investor who just writes a check and calls it a day.

 

Active vs. Passive Investing In Real Estate: Pros of Rental Properties

Buying rental properties directly comes with plenty of perks. Consider the following upsides as you decide how to invest in real estate.

 

Control

You’re in the driver’s seat when you buy properties by yourself.

You decide exactly what property you want to buy and for how much. You also decide whether to renovate it and, if so, the quality (and expense) of those upgrades.

Once the property is ready for a renter, you can screen the rental applications yourself or hire a property manager. You draft and sign the lease agreement, oversee rent collection, renew or non-renew lease agreements, and raise rents as you see fit.

Or perhaps you’d rather operate the property as a short-term vacation rental? That’s fine, too.

It’s your show; you make all investment decisions.

 

Choice of Exit Strategies

The hold time and exit strategy are entirely up to you as well. Do you want to refinance it following the BRRRR strategy, and potentially earn infinite returns? You may be able to pull your initial investment back out of the property, leaving you with no money tied up in it. Then, you hold it indefinitely, earning cash flow and letting the property appreciate even as your tenants pay down your rental property mortgage.

In fact, you could let the renters pay off the mortgage entirely, only to take out another mortgage to cash out the property without selling it. You also avoid paying capital gains taxes that way, even as you pull out your equity.

And, of course, you can sell the property whenever you like.

 

Easier Control Over 1031 Exchanges

Regarding exit strategies, ambitious investors often like to 1031 exchange their rental properties when they sell, trading up to a larger property that generates more cash flow. That defers their capital gains tax on the sold property.

As an active investor, you control the timing of both the sale of the existing property and the purchase of the new one. While not “easy” per se, you still control both transactions. You can even pull off maneuvers such as reverse 1031 exchanges to make the timing fit your needs.

While it’s possible to use a 1031 exchange for real estate syndications, it’s harder. In most cases, you have to find a deal specifically designed for a 1031 exchange — and there just aren’t that many out there.

 

Losses Offset (Some) Active Income

Nearly all of the tax advantages of rental properties and real estate syndications are identical. But there’s one exception.

To explain it, you should first understand that, as a general rule, losses on passive investments (such as stocks and real estate syndications) can only offset passive income and gains on your tax return. For example, if you show a $5,000 loss on a real estate syndication, it can only offset other passive income streams, such as other real estate income or stock dividends. You can’t use it to offset your salary or other active income.

However, active landlords get an exception: they can offset up to $25,000 in active income each year with rental property losses. So, if you show a $5,000 loss on a rental property, you can knock $5,000 off your W2 taxable income.

 

Disadvantages of Investment Properties

That greater control is all good, but it comes at a cost. Several, in fact.

 

High Cost to Buy

Individual properties are expensive, and when you buy them alone, you shoulder that cost alone.

Sure, you can borrow a rental property mortgage. But you’ll almost certainly put down 20–40% of the purchase price, which still typically means tens of thousands of dollars.

That does not include closing costs and cash reserves. You’ll need both for closing on the property, adding many more thousands to your bottom line.

 

Labor to Find Deals

A fellow real estate investor once told me, “There’s no ‘deal tree’ where you walk up and pluck off deals any time you like. You have to go out and find them.”

Sure, you can browse available properties on the MLS or an investment property platform like Roofstock. But you won’t find outstanding deals — by definition, you’ll pay market value on these properties available on the open market.

Alternatively, you can network with real estate wholesalers through Norada or Asset Column. You’ll find better deals than on MLS, in many cases. But don’t expect earth-shattering returns.

If you want the best deals, you have to create them yourself. You could find these off-market deals by driving for dollars, finding pre-foreclosures, or finding other distressed sellers.

It all takes work. Often, you have to reach out to a hundred sellers to close on one property. Think direct mail campaigns, phone calls with sellers, contract negotiations, touring properties, and vetting deals in general, not to mention the work to line up financing.

It’s a lot.

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Repair Headaches

Finding a good deal often involves buying a fixer-upper and renovating it to force equity. Read: more work.

You have to negotiate with contractors, oversee their work, and send them back in to fix the things they didn’t do right the first time. You have to pull permits from your local housing authority, hassle with inspectors, and redo more work.

You could potentially be juggling a draw schedule with your lender and coordinating with their inspector to get reimbursed for work in phases as you go along.

Oh, and you get the privilege of paying the investment property mortgage by yourself until renovations are complete, you secure a use and occupancy permit and advertise and rent the property.

 

Property Management Headaches

Laypeople love to hate landlords. They have no idea how much pain it is to manage rental properties in the rear.

Of course, filling vacancies requires plenty of work. That includes advertising units, showing them to prospective tenants, collecting rental applications, screening renters, signing lease agreements, conducting pre-move-in inspections, collecting security deposits, and putting them in the legally mandated account type.

But even after you sign a rental agreement, you have to collect the rent, and not every tenant likes to pay it. Some renters require a slew of phone calls, texts, and emails before paying the rent — if they pay it at all. Some only pay the rent if you force them to pay it by filing for eviction.

It is a process, from rent court hearings to scheduling a date with the sheriff’s office and more. I’ve had evictions take 11 months before, all while the renter lived for free, and I covered all the expenses.

Of course, you can hire a property manager. But then you need to manage the manager, checking their work on screening tenants, making sure they’re actually inspecting the property twice a year, and double-checking their invoices for hidden fees. It’s not for the faint of heart.

 

Accounting Costs

When you own a rental property directly, it’s up to you to track all the income and expenses. From the basics like property taxes and insurance to every minor repair or maintenance cost to tracking your mileage, you have plenty of bookkeeping to do.

Then, come tax season, you can fill out additional tax schedules such as Schedule E tax statements. Get it wrong, and the IRS comes a-knocking, audit in hand.

Again, you can pay an accountant extra to handle these additional headaches. But it will cost you.

Pro Tip: Our landlord software helps you automate everything from expense tracking to Schedule E tax forms. Give it a whirl.

 

High Cost to Sell

It costs a lot of money to buy the property, and it will cost you many thousands more to sell it.

Prepare to pay for everything, from paying a real estate agent to paying transfer taxes, recordation fees, and settlement attorney fees.

Oh, and remember how I said you can sell whenever you want? That’s true, but you need actually to find a buyer. That can take months, especially if you want full market value for your investment property. Which, of course, you do.

 

Passive vs. Active Investing: Real Estate Syndications

The average investor is far less familiar with passive investments such as real estate syndications than rental properties, and they’re even less familiar with gauging their risk. Take our class on asymmetric returns to learn how to spot low-risk, high-return investments.

So, how do they compare it to buying a rental property by yourself as an active investor?

 

Completely Passive Investments

These group real estate investments let you buy into large commercial properties such as apartment complexes, self-storage facilities, mobile home parks, retail properties, or industrial properties as a silent investor. In passive real estate investing, you write a check and become a fractional owner.

As such, you’re entitled to your share of the cash flow and profits upon selling the property.

You don’t have to go out and find bargains on properties yourself. There are no direct mail campaigns, no driving for dollars, and no knocking on doors.

You do not have to arrange financing, oversee renovations, or wrangle contractors, tenants, or property managers.

Instead, it’s as passive as investing in stocks, bonds, or REITs. After buying in, you just sit back and enjoy the distributions and returns.

Easier to Review Deals

To evaluate a potential property investment, active investors typically walk through the property themselves and conduct several inspections. You then have to do a complete market analysis on both property values and market rents for comparable properties.

If you’re wise, you also run the cash flow analysis through a rental income calculator. (I wasn’t wise when I first started investing in rental properties — and it cost me dearly.)

With real estate syndications, you can review the deal in its entirety from the comfort of your couch. The sponsor (syndicator) has already done the market analysis, calculated the property’s cash flow, and forecast expenses and returns. You should review them, of course, to make sure you feel they’re conservative enough, but you don’t have to do it yourself.

With an hour’s analysis, you can typically make an informed decision about whether to invest. It takes a lot more than an hour’s work to do due diligence on a rental property. 

 

Simple Accounting

Passive investors in a real estate syndication, known as limited partners or LPs, don’t have to do any of the accounting work. They don’t have to track income or expenses, track their mileage, or fill out page after page of tax forms.

Instead, they just get a K1 form from the sponsor each year. They add that bottom-line number to the appropriate line on their tax return. The end.

 

Accelerated Depreciation

When real estate syndicators buy a property, they almost always perform a cost segregation study. It reclassifies as much of the property as possible under different tax categories, with shorter depreciation periods.

The upside? You can write off more money for depreciation in the first few years of property ownership.

That in turn means that you often show a loss on your tax return, even as you collected real cash flow from the syndication. For example, you might have collected $3,000 in distributions, but showed a $10,000 loss on your tax return.

While it’s possible to conduct a cost segregation study on a single-family rental property, it’s expensive (usually $4,000–$5,000), so most investors don’t do it. That said, startup Rental Property Refund offers a service for around $1,500, specifically designed for single-family rentals.

 

(Relatively) Stable Cash Flow

When your tenant moves out from a single-family rental property, you lose 100% of your income. But you still need to make the mortgage payment, pay property taxes and insurance, repair and maintain the property.

Apartment buildings with 200 units are another matter entirely. At any given time, there are a handful of vacant units turning over. Likewise, the building requires ongoing maintenance along with regularly scheduled repairs and upgrades.

In other words, these expenses just run in the background at a constant low hum. Instead of choppy fits and starts, you get relatively smooth, predictable cash flow.

 

Options to Invest Smaller Amounts

When you buy an investment property by yourself, you have to come up with the down payment, closing costs, and cash reserves by yourself. That typically means tens, if not hundreds, of thousands of dollars.

While real estate syndications generally require a high minimum investment as well, you do have a few options to invest less. First, you can join a real estate investing club like ours, where members pool funds to meet the high minimum investment. In our club, for example, the minimum investment for individual investors is $5,000. We vet a new passive investment deal every month, and all deals are optional.

Some real estate crowdfunding platforms also make real estate syndications relatively easy and cheap to invest in. Think $10,000–$25,000 instead of $50,000–$100,000.

Though they don’t offer multifamily syndications, you can similarly buy fractional ownership in properties through platforms like Ark7 and Arrived for under $100. Ark7 even offers a secondary marketplace where you can sell shares at your leisure.

You do have some other alternative passive strategies for real estate investing. From real estate investment trusts (REITs) to diversified real estate funds like Fundrise to secured property loans like Groundfloor, you could invest as little as $10 in many of these platforms.

 

Options to Invest for Infinite Returns

Love the BRRRR strategy, and think it’s the only option to earn infinite returns on real estate?

Many real estate syndicators follow the exact same strategy, just on a larger scale. They buy a fixer-upper apartment complex, renovate each unit over the course of a year or two, then refinance it and return investors’ capital to them.

You get your money back, but you keep your ownership interest in the property. You keep collecting cash flow, and eventually when the sponsor sells the property, you get your cut of the profits.

And in the meantime, you can keep recycling the same investment money over and over again, in deal after deal.

Want to compare investment property loans?

What do lenders charge for a rental property mortgage? What credit scores and down payments do they require?

How about fix-and-flip loans?

We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Downsides of Passive Group Investments

As much as I love syndications, they have their fair share of drawbacks. Beware of the following before you start plowing your money into property syndications.

 

Few Syndicators Allow Non-Accredited Investors

Uncle Sam, in his infinite paternalism, doesn’t think lower- and middle-income Americans are responsible enough with their money to invest in real estate syndications.

The SEC regulates real estate syndications to make it difficult for sponsors to accept non-accredited investors. As a result, most syndications are only available to wealthy, accredited investors.

Some sponsors go out of their way to allow non-accredited investors under regulation 506(b). But they aren’t allowed to advertise publicly, making it harder for them to raise capital and harder for you as an investor to find them. You have to establish a relationship with them before they accept your money.

This is precisely what Deni and I have done with our Co-Investing Club. We’ve established relationships with sponsors to connect you with them.

 

High Minimum Investment (If You Invest Solo)

As mentioned above, the typical real estate syndication requires a minimum investment of $50–100K. Woof.

Most of us don’t have that just lying around. And even if you do, committing to a single asset’s a lot of money.

Fortunately, you can pool money with other investors to reach that minimum, precisely what we do in our Co-Investing Club.

 

Lack of Control & Liquidity

With a rental property, you decide how to renovate it and when. You choose how aggressively you’ll screen tenants, which tenants to accept, and how much rent to charge.

With a passive real estate investment, someone else does everything for you. It saves you time but also takes you out of the driver’s seat.

Most importantly, you don’t know when to sell the property. Or, for that matter, whether you’d rather refinance it than sell (or vice versa). You don’t have any control over liquidity — you get your money back when the sponsor refinances or sells, and not a moment before.

 

Few Deals Designed for 1031 Exchanges

Some sponsors design deals specifically for 1031 exchanges and tell you upfront that they plan to roll the proceeds from one deal to another upon sale.

But don’t expect to find many of these deals. In most cases, sponsors just pay out investors when the property sells and then move on.

Granted, you can negotiate with sponsors to let you invest just your portion as a 1031 exchange. However, this requires more complexity for the sponsor in structuring the deal, which means they only do it for investors looking to invest huge sums of money—a minimum of $500,000, sometimes $1 million.

That’s not practical for most of us; even if it is, it sinks an enormous amount into a single investment.

 

Factors To Consider When Weighing Active vs. Passive Real Estate Investing

We can talk about active vs passive real estate investing all day until we’re blue in the face, but when all is said and done, it will be up to you to choose which is better. So, here are the most important things to consider before making your choice:

Time Commitment
Control Over Decisions And Operations
Risk Tolerance And Exposure
Income Potential And Return Expectations
Capital Requirements For Initial Investment
Scalability And Ability To Grow
Liquidity (How Easily You Can Exit The Investment)
Tax Implications For Different Investment Types
Market Knowledge And Experience Needed
Long-Term Financial Goals (Steady Income Vs. High Profits)
Legal And Regulatory Responsibilities
Diversification Potential Within Your Portfolio

 

Final Thoughts on Passive vs. Active Real Estate Investing

I’ve invested in real estate syndications and rental properties, and I’ve experienced their ups and downs firsthand.

Today, I no longer invest actively in rental properties. It just takes too much work to do it right. 

I now invest in passive real estate syndications every month, investing $5,000 per syndication deal alongside the other members of our real estate investment club. 

That doesn’t necessarily mean you should do the same. If you value control over time and effort or are looking for a real estate side hustle rather than a completely passive investment, consider rental investing.

I just want a diverse real estate portfolio; I want the results. I don’t need to control active management or manage day-to-day operations anymore.

I invest in the stock market similarly: passive funds such as exchange-traded funds (ETFs) and mutual funds. I don’t pick individual stocks anymore, trying to prove my cleverness. My risk tolerance is lower, and so is my tolerance for active investment strategies.

The eager beavers can have fun renovating properties, and they don’t have to worry about my competition. I’d rather have more time to spend with my wife and daughter, more time traveling the world, more time hiking, or hanging out with friends.

 

Do you lean toward passive or active strategies for investing? Would you prefer to be an active manager or passive manager of your real estate investments? Why?

 

 

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