Passive investing vs Active investing

Passive investing vs Active investing Overview

What is Active investing?

Active investing involves handling money actively with the primary goal of maximising returns. Using a variety of techniques and approaches, active investors closely examine economic and market trends in order to select stocks and other assets that are predicted to outperform the market. This method calls for a significant investment of time and knowledge.

 In commercial real estate, active investing could involve buying properties, improving them through repairs or renovations, or changing their use, and then selling at a profit.

What is active real estate investment?

When a person or group of people directly purchases a property, they have total control over management choices. This is known as an active real estate investment.

Example

Purchasing, selling, or renting properties is the main work associated with active real estate investing. A fix-and-flip property investment is a popular type of real estate investment. This is the process by which a property is purchased by an investor and then fixed up to sell for a profit. These investments require a significant financial and time commitment and can be very risky.

Pros of Active Investing

• Higher Profit Potential: Actively managed real estate investments can generate significant returns in a shorter time frame, especially when the investor successfully adds value to the property through renovations or changes in use.
• Greater Control: Active investors can make reasoned decisions and actions that directly impact the property’s value, giving them more control over their investments.
• Market Knowledge Advancement: Active investing prompts investors to stay informed and knowledgeable about the market, thereby sharpening their investing acumen over time.

Cons of Active Investing

• Time and Effort Intensive: Active investing demands considerable time and effort to manage and track the property, requiring investors to dedicate their attention to multiple aspects of the investment.
• Higher Risks: As active investors, risks from market volatility, property management, and renovation projects require close monitoring and management to protect the investment.
• Increased Costs: Frequent buying and selling actions, along with renovation or management expenses, can result in higher overall costs for the investor.

What is Passive investing?

Passive investing, compared to active investing, takes a long-term approach to holding investments. Although it can be applied to any financial instrument, index investing is the most popular form of passive investing. Typically, passive investors purchase index funds in order to avoid continuously examining individual securities. Rather than outperforming the index, the goal of the investment strategy is to produce consistent index returns.

In other words, it’s a ‘buy-and-hold’ strategy. When applied to commercial real estate investment, passive investing might look like purchasing a property and holding onto it for long-term appreciation while earning rental income.

What is passive real estate investment?

Investing in real estate as a passive strategy that involves buying shares in an LLC that holds the property.

Example

Real estate funds, crowdfunding platforms, and real estate investment trusts make up the majority of passive investment options. For any of these to work, the investor must put in a certain amount of money at least and wait for a while to see a return. By using these strategies for investing, you are not creating a real estate portfolio. Rather, you are essentially making an investment in the portfolio of another person, with the hope that both of you will profit.

Pros of Passive Investing

• Reduced Stress and Time Commitment: Passive investing’s ‘buy-and-hold’ nature allows investors to sit back and watch their investment grow over time, minimizing the need for constant monitoring and decision-making.
• Lower Costs: With fewer transactions taking place, passive investors can save on broker fees, property management costs, and other transactional expenses.
• Steady Income Stream: Passive investing in commercial real estate frequently generates rental income, providing a stable and consistent revenue source for investors.
• Tax Advantages: Investors can benefit from property depreciation, which can reduce taxable income on rental earnings.

Cons of Passive investing

• Initial Capital Requirement: Passive real estate investments often necessitate sizeable upfront capital.
• Slow Return on Investment: Since this strategy relies on long-term appreciation, it can take years to see substantial returns.
• Limited Control: Passive investors have minimal influence over the property’s value growth, leaving them susceptible to market fluctuations.

Difference between active vs passive investing: Which is better?

Here’s a comparison table on difference between active vs passive investing:

Criteria	Active Investing	Passive Investing	Which is Better?
Risk	Higher due to market volatility and property management challenges	Lower as the investment relies on market trends for growth	Depends on your risk tolerance
Profit Potential	Potential for higher returns in a shorter time frame	Steady returns generated through long-term appreciation and rental income	Depends on your investment goals
Time and Effort	Requires significant time and effort to manage and track the property	Minimal time and effort needed due to its ‘buy-and-hold’ strategy	Depends on your time commitment
Control	Greater control over property value growth	Limited control as value growth depends on market trends	Depends on your preference for control
Costs	Higher due to frequent buys, sells, and renovation expenses	Lower costs due to less frequent transactions	Depends on your budget and transactional costs
Investment Knowledge Required	More extensive knowledge of market and property management is necessary	Requires less specialized knowledge and expertise	Depends on your level of expertise
Diversification and Portfolio	More opportunities for diversification within your portfolio	Limited to the investment assets in the ‘buy-and-hold’ strategy	Depends on your diversification preferences

Ultimately, choosing between active and passive investing should be based on your individual preferences, financial goals, risk tolerance, time commitment, and market knowledge. It’s not a matter of one being better than the other but rather finding which method aligns best with your objectives and investing strategy.

Fractional ownership real estate: An emerging passive Investment option

Fractional ownership in real estate is emerging as an attractive passive investment option that allows multiple investors to own a share in Grade A commercial properties, and mitigate the risk of owning high-valued properties.

According to Knight Frank data, the market size of fractional ownership properties in India is projected to grow by 65 percent, from $5.4 billion in 2020 to $8.9 billion in 2025, at an annualised rate of 10.5%.

Through platforms like Assetmonk, you can invest in a fractional ownership model where investments are secured and start as low as 25 lakhs.

Here’s why fractional ownership serves as an excellent vehicle for passive investment in real estate:

• Lower Capital Requirement: Fractional ownership allows investors to invest in high-quality properties that might otherwise be outside of their budget. Fractional purchase reduces the entry barrier for individuals who wish to invest in premium real estate assets.
• Diversification: By purchasing shares in different properties, investors can effectively diversify their portfolio. This spread of investment can reduce risk and lead to more stable returns.
• Professional Management: Fractional ownership properties are usually managed by professional management companies. This negates the need for day-to-day involvement that a typical property owner might have, making it an excellent passive investment choice.
• Income and Appreciation: With fractional ownership, investors can enjoy a share of the rental income, along with property value appreciation over time. The combination of both can lead to compelling returns.
• Access to Larger Markets: Fractional ownership opens up possibilities to invest in lucrative property markets that may be geographically distant. Investors can own a part of a commercial building or a luxury condo in a prime location without being resident in the area.
• Liquidity: Depending upon the platform and the demand, fractional shares are often easier to sell than entire properties, enhancing liquidity for investors who need to exit their investment.
• Risk Management: With fractional ownership, the financial risk is shared among all owners. This can provide a buffer against market downturns, vacancies, or unforeseen expenses linked to the property.

Overall, fractional ownership in real estate democratizes property investment by lowering entry barriers and facilitating portfolio diversification. It provides a genuinely passive investment experience for savvy investors  who wish to profit from real estate investment without having to deal with the hassles of property management by utilising professional management for property upkeep and operations.

Bottom Line

The decision between active and passive investing ultimately depends on individual preferences, financial goals, available time, and risk tolerance. Active investing, with its hands-on approach and potential for high returns, requires substantial time, market knowledge, and a higher risk tolerance. 

In contrast, passive investing offers a more hands-off approach, allowing investors to benefit from long-term market trends with less time and effort, often resulting in steady, risk-adjusted returns over time.

Regardless of the chosen path, success in investment is often determined by disciplined planning, patience, and maintaining a keen eye on both risks and opportunities.

Assetmonk, an alternate investment platform, provides great passive investment opportunities in the form of fractional ownership, Real estate structured Debt.

 Assetmonk’s fractional ownership options secured by SEBI,  offer a high potential earning yield of 14 to 21% annually.

Investors can profit from an assured 17 % Internal Rate of Return (IRR) by taking part in our structured debt offerings in the commercial real estate sector with a minimum investment of Rs. 10 lakhs. Start investing today!

FAQs

Q1. What is the difference between active vs passive investing?

A. Active investing involves taking a hands-on approach, including frequent buying and selling of assets with the intent to outperform the market. In contrast, passive investing follows a buy-and-hold strategy, relying on market returns over the long term. This is the basic Difference Between Active vs Passive Investing

Q2. Is active investing better than passive investing?

A. It’s not a question of better or worse but rather which strategy suits an investor’s personal goals, risk tolerance, level of expertise, and time commitment. Some may find the potential for higher returns with active investing appealing, while others may prefer the lower-risk, lower-cost approach of passive investing.

Q3. Why choose passive investing over active investing?

A. Passive investing might be chosen for its typically lower costs, lesser time commitment, and if investors are more comfortable with market-average returns. This strategy might be more suitable for investors inclined towards a hands-off investment approach or those who are risk-averse.