There are many advantages of investing in real estate, including monthly cash flow, appreciation & wealth creation, tax benefits, diversification, and leverage. Thus, all you need to do is buy a property and collect the monthly cash flow, right? Not quite.
Like any other investment, purchasing real estate requires upfront diligence and managing the asset in order to optimize performance and returns. The beauty of real estate is that one can implement various investment approaches – active, passive, or both.
The active approach requires time, a high level of commitment, and experience. As an active operator you invest time in selecting a market, building relationships with local brokers or directly with owners, finding a deal that meets the criteria of your partners and investors, vetting and selecting your deal team (property manager, attorney, CPA, lender, asset manager, contractor, etc.), managing the manager, and executing on the business plan. As an active investor, you are the hands-on owner-operator/sponsor/General Partner “GP”, you carry the risk of personal liability (should a professional tenant initiates a lawsuit for example), and you may also need to put up personal liquidity and your personal balances sheet into the deal.
The passive approach requires capital and upfront diligence to vet the sponsor and the investment asset. Thereafter, the investors receive dividends and monthly cash flow and are typically paid their share of the profits before the GP. As a passive investor/Limited Partner (LP), you do not control the daily operations of or make decisions on how to operate the assets (including when to sell the asset), which is why you need to be comfortable with the sponsor’s character, ability to execute, and overall track record. However, your personal liability is also limited.
Both passive and active real estate investing can allow for the creation of cash flow. Over time, this can add up to building meaningful liquidity and a monthly income stream that can help replace some or all of the W2/earned income necessary to become financially free.
As with any investment, there are risks involved, which we’ll discuss in a subsequent quick tip article.
Should you have any questions or want to learn more about real estate investing, please reach out to email@example.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.