What’s the difference between active and passive investing? Read on to find out which option is best for you!
If you’re sold on multifamily, the next question is whether you want to be an active or passive investor. So, what’s the difference?
In this week’s video, I weigh in on the different ways to get involved in apartment investing. I define the roles of active vs. passive investors and reveal which is better.
I discuss the role of the traditional syndicator and explain why it’s increasingly common for several active investors to form a joint venture partnership—with each General Partner specializing in one part of the deal.
I also describe who is better suited to passive investing, sharing the pros and cons of contributing money rather than time.
You’ll understand the role each investor plays in a multifamily deal so you can decide which route to financial freedom is right for you.
Watch the video below (or keep reading).
Here are the different active roles you can play in a multifamily syndication.
Active Role #1: Traditional Syndicator
Traditional syndicators manage a deal from start to finish. They source deals, perform due diligence, assemble the advisory team (property manager, real estate attorney, mortgage lender, CPA, etc.), amass the necessary capital, negotiate the contract and finally, close on the apartment building. From there, they carry out the business plan and manage the property until its sale.
If that seems like A LOT of responsibility, it is. Luckily, there are other ways to get involved in multifamily as an active investor by specializing in just one part of the transaction rather than the whole thing.
Active Role #2: Deal Finder
Do you like the idea of talking to brokers and making offers? If so, you may want to take on the role of deal finder, the General Partner (or “GP” for short) who is responsible for identifying an opportunity and bringing it to the operator.
If you are good at building relationships and underwriting deals, this is your ideal option.
Active Role #3: Capital Raiser
If you are a people person, but the idea of analyzing deals doesn’t light you up, you might prefer the role of capital raiser. This GP spends most of their time talking to potential investors and raising money for deals.
Active Role #4: Asset Manager
If you are interested in running the day-to-day operations of apartment buildings, then asset management is where you want to be. This role is best suited to a GP who is extremely organized and detail oriented.
Active Role #5: Chief Analyst
If the role of Deal Finder seemed almost perfect, but you were more drawn to the idea of analyzing deals than talking to brokers, you might be a chief analyst. This GP leverages their love of spreadsheets to underwrite deals.
More and more, small groups of active investors are forming joint venture partnerships, each using their strengths to fulfill a specific role—and earning GP equity in the deal.
If active investing is not for you, then consider being a passive investor, also known as “limited partner” or “LP” for short.
Here are two roles you can play as a Limited Partner:
Passive Role #1: True Limited Partner
If you have a demanding full-time job and a lot of responsibility, active investing is a challenge simply because of its demands on your time. If you don’t have the bandwidth to get educated in multifamily and make decisions around the day-to-day financing and management of a commercial portfolio, then passive investing may be a better option.
True LPs invest their money in a deal, but don’t have to worry about the day-to-day operations.
Passive Role #2: Key Principal or Co-Sponsor
If an active investor has proven themselves to be a quality operator but doesn’t have the net worth to qualify for financing on a big-ticket deal, they might enlist the help of a high net worth individual to co-sign the loans.
The co-signer then becomes a “Key Principal” or “Co-Sponsor”, earning a stake in the general partnership—whether they invest money in the deal or not. (The co-sponsor is still considered passive because they have limited ongoing involvement in the deal.)
Active vs. Passive Investing
The beauty of active investing is that you have more control AND you can earn a profit without putting your own money in the deal!
The downside is that you’ve got to put in the sweat equity, devoting a great deal of time to fulfilling your role in the partnership. In addition, GPs take on legal liability that passive investors (also known as “Limited Partners” or “LPs” for short) do not.
Passive investing means putting your capital in a multifamily syndication and trusting the general partner and their team to manage the investment. If you have money to invest and you’re comfortable allowing the syndicator to make decisions on your behalf, then this is the best route for you. (Without a doubt, you will need to vet the operator carefully and establish their credibility and integrity before handing your hard-earned money over to anyone.)
As a passive investor, you also enjoy limited liability and asset protection. You can only lose the amount you invested in the apartment building; should something go wrong with the property, you are not legally responsible.
Passive investing can also serve as a gateway to becoming an active investor. Investing in a syndication can provide the opportunity to learn about the process and build your resume, making the transition from passive to active investor a seamless one.
What’s Better? Active or Passive Investing
If you don’t have any money to invest, the answer is fairly simple: your one and only path is to be an active investor.
If you DO have money to invest and you love the idea of being a fulltime entrepreneur – then being an active investor might be the way to go. You might want to consider passively investing with an experienced operator who will let you “look over his shoulder” so you can learn the business.
You can also get educated by checking out our online training and mentoring programs.
If you have no desire to be an entrepreneur or it’s not in the cards for you right now, then invest passively. If you’re interested in investing with us, join the Nighthawk Equity Investor Club!
So, what’s better? Active or passive investing?
Ultimately, it depends on your circumstances and how you’re wired. Either way, you’re working toward the same result—financial freedom!