Real estate is often presented as one of the most stable and convenient forms of investment. It is true that you can get great returns on real estate investments, but for the best results, you need to be informed on how it works. One of the most frequently confused subjects is active versus passive real estate investment. Here are some important things to know about these common types of real estate.
What Is Active Investment?
Actively investing in real estate is essentially making real estate investment one of your main sources of income. According to the IRS, active real estate investors are people who either do more than 750 hours per year in real estate business and property trades or people who spend over half their time working in property trades or the real estate business. People who do something like run several rental properties, make a lot of property trades, or spend their time flipping houses are typically active investors.
How Does Passive Investment Work?
Passive investment in real estate means that you are not spending a lot of your time focusing on real estate. Instead, this style of investment often involves putting money into mutual funds or real estate investment trusts. You simply contribute money to an organization or stock in the real estate business, and then you get money back based on how well the investment does.
Which Is Better?
There is no hard and dry rule about which type of real estate investment is the better choice. Passive investment is often ideal for those who are just getting into the business, because they can start with as much or as little cash as they want. It is also useful because you do not have to put a lot of time into doing every part of real estate yourself, so you make your money work for you. However, active investments can be good if you like managing things yourself and have a little free time. There are potentially higher returns on active investment, especially when you factor in tax breaks for active investors.