Is The Juice Worth The Squeeze?

DO YOU PREFER ACTIVE OR PASSIVE INVESTING?

Is The Juice Worth The Squeeze?

I enjoy a glass of fresh squeezed orange juice.  But I don’t necessarily want to squeeze the oranges.

Owning real estate can be like getting fresh squeezed orange juice.  Sometimes we prefer someone else to do the squeezing.

Do you ever spend time comparing different investments while trying to decide where to put your money?  Or do you prefer to take an easier way and let someone decide for you?

Some people like to do it all themselves.  They might find and purchase a house that has been neglected, then rehab it and find a tenant who will take care of the house and pay rent.

Other people will think that approach takes too much effort.

Different people prefer different approaches to investing.  It doesn’t mean that either one is wrong.  Each has its advantages.

Some people like to get very involved in their investments. It might be to seek higher returns.  Or they want to have more control.  Others like to be hands-off and spend their time doing something else.

A lot of people fall into the latter group.  They want good returns, but they don’t want to take on the responsibilities or hassles of being a landlord.  And some just want someone else to figure it out for them.

It can get confusing.  How do you decide which is the best way to invest?

Here are a few questions to ask that can help you decide what kind of investor you want to be.

ONE.  Do you prefer to be an active or passive investor?

Some people prefer to be passive.  They might have a high-paying job that allows them to stash away a significant portion of their income.  Or their job or business might be very time-consuming, not allowing much time to study and learn about different investments.

Other people desire to be active investors.  It might be the thrill of the hunt and creating something nice.  Such as finding a distressed property that can be turned into something that people want to live in.  

For others it might be having control over the investment.  This is in sharp contrast to how stocks are valued on Wall Street.

For some people, having an active real estate flipping business not only provides monthly income, but also provides a stream of properties to choose from for long-term investment.  There is synergy between their active and passive sources of income.

It takes time to learn how to be an effective active real estate investor.

Have you decided whether you want to be active or passive?  It might be that there are times for each.

TWO.  What is my baseline return for little to no effort?  

A bank certificate of deposit, or CD, can provide a steady return of maybe 2-4 percent per year.  But that doesn’t provide anything over and above inflation.

The stock market has averaged 9-10 percent per year but can vary wildly, dropping over 40 percent at times.  This return is easily attained with an index fund over a long period of time.  Think in terms of years.

Passive investments in real estate partnerships, such as syndications, frequently produce higher returns.

What is the baseline return that you expect from your investments?

THREE.  Is the juice worth the squeeze?

How much better is the return I can get by putting in some effort?  And how much effort does it take?

For example, does the return go from 15 to 20 percent by being active?  If so, how much more would you make in terms of dollars?

What is your time worth?  How much of your time and effort does it take to get a better return than your baseline?

FINAL THOUGHTS

We ask ourselves these same questions when looking at passive and active opportunities.

If we expect a passive investment opportunity to produce better returns than our baseline, then we will consider it and compare it with other opportunities.

However, if we see a property for sale that takes considerable effort just to meet our baseline expectations, then we would have to acquire it significantly cheaper or on very favorable terms for it to be considered.  We need to make sure that we compensate ourselves for the time we will invest managing it.

As syndicators, we are constantly looking for investment opportunities.  Sometimes we elect to be passive investors.  And sometimes we are able to structure a deal from the beginning that provides good returns for everyone.  That includes both active and passive investors.

Sometimes other syndicators need help raising funds for an acquisition.  That can give us opportunities to invest passively and also share the opportunity with others.

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Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.  

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