Active vs. Passive Real Estate Investing: What’s Right For Physicians?

[This article is a guest contribution from Jamie McGee, Director at Faes & Co.  Though our website does have a business relationship with Faes & Co., I work tirelessly to only form relationships and recommend products that I have vetted.  I have met with Jamie and his colleagues personally and believe their real estate investments offer a great opportunity for physicians to diversify their investment portfolio.  For that reason, I am excited to feature their work this week, and encourage you to reach out to Jamie if you wish for more information on what they offer.]

Real Estate Investing For Physicians

For the busy physician, life can be a blur of activity, as they are constantly on the go and inundated with responsibilities that can’t be contained within the standard 8-5 workday (not to mention those weekends on call). Investing in real estate intrigues many as an opportunity to generate additional income, tapping into the wealth that has been amassed and making it work for them in new and expanded ways.

However, having the desire to invest in real estate is simply not enough for a person to act. After all, moving too quickly and without a strong understanding in the investment can result in some seriously detrimental effects that could cause significant financial harm and sour the experience of investing in the future.

So, what is the best way to begin? Let’s get started by learning about active real estate investing and passive real estate investing, as these will be building blocks towards creating your own personal investment ecosystem in the world of real estate. It’s essential to know the difference between the two, as well as the pros and cons of each, to ensure you are making truly informed decisions that will align with your investing style and benefit you now and in years to come.

What Is Active Real Estate Investing?

The word “active” says it all, as active real estate investing is a totally hands-on approach that engages the investor in more expansive ways. Those involved in active investing will be much more front and center in the process, which can mean deep entrenchment in certain parts or even being a major player throughout (such as property research, negotiation, and upon purchase, management). You’ll find that active investing comes in different forms, such as through fix-and-flips or rental properties.

Pros

• Flexibility and control: Make decisions on buying and selling at one’s own discretion, allowing for quick responses to market opportunities and risks.
• Potential for higher returns: Achieve significant returns by leveraging market expertise and strategic investments.
• Tax benefits: Depending on the investment, deduct expenses related to property taxes, maintenance, and management fees.

Cons

• Higher risk: Greater potential for significant losses due to market volatility and poor investment decisions (e.g., risky commercial real estate investments with high interest rates making it difficult to generate profits).
• More expenses: Higher costs associated with transaction fees, professional advice, and managing properties.
• Time-intensive: Requires significant time and effort to manage and monitor investments, often a long-term commitment of 3-5+ years during which the market can change dramatically.

What Is Passive Real Estate Investing?

In comparison to the active approach, passive real estate investing is considerably more hands off, as once the property is purchased it is then turned over to another individual for total management (such as maintenance, repairs, etc.). This can be a very attractive avenue to pursue, especially for those with jam packed schedules (like medical professionals) and need to save brain space for other things. Examples of passive real estate investing include crowdfunding, which involves combining capital with other investors to purchase a property, and fractional ownership of rental properties.

Pros

• Lower risk: Generally, less volatile and risky as investments are often diversified and managed by professionals.
• Low initial cost: Lower entry costs, making it accessible with smaller capital requirements.
• Diversification: Ability to spread investments across various assets, reducing the impact of any single investment’s poor performance.
• Minimal time commitment: Requires less time and effort compared to active investing, as professional managers handle the investments.

Cons

• Limited control: Investors have little to no say in specific investment decisions, as these are typically managed by fund managers.
• Potentially lower returns: Generally, lower returns compared to active investing, as passive investments often follow broader market trends.
• Lack of flexibility: Limited ability to react to market changes or capitalize on emerging opportunities.

Key Considerations

For investors considering passive real estate investments, such as those in private credit funds, the stability and consistent returns can be appealing, as well as the ability to have your capital returned quickly (some funds require just a 1-year lock in period). Such investments can offer a steady income stream, often with lower risk compared to the volatile nature of the stock market or more active investment strategies. While the potential returns may not be as high as those in active investing, the reduced risk and effort required can make passive investing an attractive option for many investors.

What’s Next In Your Real Estate Investing Journey?

To determine whether active or passive real estate investing is right for you, consider the following questions:

• How much risk am I willing to take? Active investing typically involves higher risk, while passive investing tends to be more stable and less volatile.

• What level of control do I want? Active investors have more control over their investments, while passive investors leave decisions to fund managers.

• How much expertise and skill do I have? Active investing requires a deeper understanding of the market and investment strategies, whereas passive investing relies on the expertise of fund managers.

• How much time can I dedicate to investing? Active investing demands significant time and effort, while passive investing requires minimal time commitment. 

Active vs. Passive Real Estate Investing: What’s Right For Physicians?

Navigating the realm of real estate investing can appear complicated, and while certainly complex, laying the basic groundwork of understanding the process can move mountains. Finding whether active real estate investing or passive real estate investing is right for you will get you on track to secure that additional stream of income you seek, not to mention the confidence in spreading your wings to explore other investment opportunities for further diversification.

If you would like more articles about real estate investing for physicians, check out How Real Estate Investing Can Accelerate Physician FIRE Now!

To learn more about active and passive real estate investing, please contact Jamie at jamie.mcgee@faes.co. 

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Standard Disclaimer: None of the information on this website is meant as individualized financial or medical advice.  These posts may contain affiliate links.