We are in what many would describe as “unique” real estate markets where as many people are forecasting a rise as forecasting a downturn. As a consequence, it can be difficult to remain focused on your long-term investment goals. It also prompts the question, passive or active real estate investment, which works best?
Choose a strategy which works for you
Before we look at the pros and cons of passive and active real estate investment, it is worth noting that you need to choose a real estate investment strategy which works for you. It needs to be a strategy which you feel comfortable with and one which will give you the best chance of hitting your investment target in the long term. There’s nothing to say you cannot switch between passive and active investment strategies but whatever you do decide you need to adjust your investment focus accordingly.
Passive investment in real estate
While the term passive investment might suggest simply investing money in real estate and leaving it for the longer term, it is not quite as simple as that. Passive investors do have a long-term goal in mind, and they are less active than traditional investors, but they still do an enormous amount of research. Passive investment tends to be very closely associated with strong rental income streams which can be used to add further long-term investments to a portfolio. However, if a long-term scenario changes, or a better long-term investment emerges, there could still be some significant switching of assets along the way.
Active investment in real estate
Traditionally active investment in real estate tends to revolve around short to medium term capital gains as opposed to long-term rental income. While this is not always the case, an active investor is more likely to trade assets on a regular basis, banking profits and moving onto the next opportunity. Some investors who describe themselves as “active” may also maintain a long-term backbone of solid value investments which could remain relatively static while trading around the edges.
Which works best, passive or active investment?
In these difficult market conditions it is possible to actively traded real estate assets, taking advantage of mispricing opportunities and banking short-term profits. When you bear in mind the monumental political and economic announcements we have seen over the last 12 months, markets have been fairly volatile and traders have made full use of this. However, snipping a short-term gain here and there can very quickly be taken out by one significant loss. Be careful!
On the other hand, passive investors tend to take a longer-term view and are willing to ride the volatile waves in between. As a consequence, they can sometimes be a little slow to react to changes in the long-term potential of a particular market or assets. However, history shows us that the more successful real estate investors of today do take a long-term view although they are not against speculative investments – chasing a short to medium term profit.
Whether you are looking at passive or active investment, if it works out perfectly then both certainly have their attractions for real estate investment. However, pigeonholing yourself as one or the other can be dangerous and the more successful investment gurus of today are open to both options. On the surface there appears little difference between short-term speculative investment and investing in mispriced assets but in reality there is a big difference.