The Pros and Cons of Passive Investing
One of the first things I am asked by people who are about to become property investors is whether they should become active or passive investors.
Perhaps it’s the boom of reality TV shows about home renovations or property ‘flipping’ that has some people wandering whether or not they should don a hard-hat and high-viz vest, but my answer is always the same: Understand the pros and cons of passive investment and make an informed decision based on your abilities and circumstances.
Here are some of the pros and cons of passive investing:
Pro: Passive investment saves you time
A passive investment does its thing in the background – literally making you money while you sleep. You aren’t actively involved, therefore you can focus your time and energy on other things, whereas active investment can be all-consuming.
How much time do you have in your life to allocate to property investment? If you are employed full-time, how much time and energy could you commit to fixing up a property? If the answer is a ‘a few hours a week’, then active investment is not for you. Some people believe that making money always has to involve sweat and labour, but this doesn’t need to be the case.
Con: Passive property investing is slow
Passive investing can take time. It’s a case of ‘slow and steady wins the race’ and no-one gets rich overnight. Property investment is a long-haul strategy and you have to be patient to see results. If you buy in a safe area, in a large regional city, you can expect the property to double in value every seven to 20 years.
If your financial goals are to realise a profit in the short-term, then active investment might be a better option, but you have to enjoy renovating properties and have experience in order to make a return in the short-term.
Pro: Passive investment is safer
Passive investing in the right area is generally a very safe investment option whereas flipping houses requires ongoing due diligence to manage the project cost effectively. It also requires expert local knowledge to ensure you don’t overcapitalise on the investment. You might flip a dump and turn it into a beautiful property, but it’s only worth what the market will pay for it.
Pro: Passive investment is cheaper
The strategy I advocate involves spending around $30a week to control the property and let the market do its thing. Flipping properties often requires a significant amount of cash up front and the flexibility to accommodate unforeseen issues.
Pro: Passive investing offers greater freedom
I once had a client, Mark, who joined my property investment program. He wanted to invest in property but didn’t have anywhere near enough money saved up for a deposit. He was a truck driver who worked very long hours. He eventually saved up a deposit for his first investment, and after we did the numbers he was positive to the tune of $109 a week.
In only 12 months, the property went up by $40,000. Mark has since invested in other properties, allowing him to stop working long hours in order to survive financially.
Pro: There is no emotional attachment with passive investment
Passive investors tend not to get emotionally attached to their properties, unlike active investors who waste their precious time getting a property looking the way they like it, only for a tenant to paint the walls a different colour!