Active investing vs. passive investing Which one is better for you?

The contrast active investment vs. passive investing is one of the first things you should be clear about as a real estate investor. After all, you need to understand how both concepts differ in order to know which one best suits your way of investing.

Real estate investments are gaining strength among those who are wondering how to generate passive income. After all, their average profitability is between 7.5% and 10.5%. Of course, only those who master concepts such as active and passive investing are able to maximize their profits quickly and safely. Become a well-informed investor by reading our post.

What is active investment?

Active investing is an investment strategy that seeks to exceed the average return of a specific market index (e.g. REIT). Its demanding dynamic of "buying and selling" requires the investor to be fully involved in decision-making.

Active management requires us to be aware of how the real estate market is evolving in order to take advantage of specific opportunities through the strategic purchase and sale of shares. Since many investors do not have enough time and knowledge to do this, they usually entrust this task to professional managers.

Types of active investment

• Flipping Houses: buying houses to renovate and resell them.
• Rent to Rent: Hire a long-term rental to make it profitable with shorter subleases.
• Build to Rent: participate in a real estate promotion whose homes will be used for renting.
• Purchase of properties with delegated management: the investor acquires ownership of the property, delegating the active management of his investment to a specialized company. This way, you can receive the rent without having to worry about additional paperwork.

What is passive investment?

In passive investing, the investor only seeks to match the profitability of a real estate market index (e.g. REIT). Being based on the "buy and hold" strategy does not require as much dedication as active investments.

The passive management strategy consists of acquiring real estate assets that replicate the behavior of a given index. The way to achieve this is to invest in a portion of the market, not in individual stocks.

Types of passive investment

• SOCIMIs (Listed Investment Companies in the Real Estate Market): Companies that own a diversified real estate portfolio sell shares to their investors in exchange for dividends.
• Real estate crowdfunding: web platforms that allow small amounts to be invested in real estate projects, the return being proportional to their success.
• Real estate funds, passive investment can take place in both listed (ETFs) and indexed.

The main differences between active and passive investment

Active investment vs. passive investment: comparative table

A comparative table Active investment vs. passive investing is an excellent way to graphically expose these two concepts. Here we will expose all their differences before stopping to analyze the most relevant ones.

Active management vs. passive: analysis of its key differences

Profitability

The active manager focuses his efforts on maximizing the return on his investment. That is why you should always be analyzing possible real estate opportunities.

The passive manager does not seek to obtain the greatest possible benefits at all times. He just wants to match the performance of a market index. He prefers predictable results rather than spending his time comprehensively analyzing market developments.

Flexibility

The active manager designs his investment portfolio to measure, providing it with great flexibility. Thanks to this, your investments can adapt quickly to the fluctuations of the real estate market. If you act quickly and diligently, you will enjoy greater protection against volatility.

The passive manager does not get involved in personalizing his investment portfolio. This greater rigidity hinders the timely adaptation to a changing market. Therefore, you will not be as protected against volatility as the passive investor.

Risks and costs

As the active manager aims to outperform the market, he must be willing to take greater risks than the passive one. The costs you will pay will also be higher (1.24% on average) due to the higher transactional frequency.

The passive manager, being less ambitious in terms of the profitability of his real estate investment, assumes fewer risks than the active investor. The lower transactional dynamics leads you to pay fewer expenses (0.60% on average).

Which one is better for my case?

As we have seen in the comparison Active Investment vs. passive investing, neither strategy is better than the other. Its greater or lesser convenience will depend on what your investment profile is. Pay attention to our tips to find the one that suits you best.

When to choose active management?

• You aspire to have the highest possible profitability in a particular year, even if that is to the detriment of your long-term profits.
• You have enough time to devote to the control of your real estate investments.
• Accounts with experience and knowledge necessary to predict the evolution of the real estate market.
• You don't mind paying more for transactional commissions and taxes.
• You have a high risk tolerance.
• You want your investment to be protected against volatility.
• You like to customize your investment portfolio by selecting the financial assets that make it up.
• You feel like a fish in the water with short-term transactions.

Do you know how the real estate market works and do you like to monitor it closely? Are you looking for the highest return and not afraid of risk? Definitely, active management fits you if your investor profile is aggressive and experienced.

When to choose passive investing?

• You want to make gains over time, even if it means overlooking specific performance peaks. What you are looking for is a consistent investment so that you know at all times what to expect from it.
• You do not have enough time to analyze the market evolution.
• You do not have advanced knowledge or experience about the operation of the real estate market.
• You want to save on the payment of commissions and taxes.
• You have a low risk tolerance.
• The least protection against market volatility is not something that takes away your sleep.
• You don't want to personalize your investment portfolio. As you are concerned about the transparency of the fund where you invest your money, you prefer to invest in all the companies that make up the benchmark index.
• You are comfortable with long-term investments.

In conclusion, passive management is for you if your investment profile is conservative and long-term. You prefer to sacrifice some profitability in order not to take too many risks. In addition, your knowledge of the real estate market is not so high as to predict its evolution and you do not want to devote much time to the matter either.

What are the advantages and disadvantages of active and passive investing?

A comparison of an active vs. passive investing would not be complete without stopping to analyze the pros and cons of each of them. After all, these advantages and disadvantages are what define the investor profile to which they are aimed.

Active management: advantages and disadvantages

Advantages

• Flexibility (the manager chooses the actions he deems appropriate).
• Higher profitability.
• Wide range of investment options.
• Direct control by the investor.

Disadvantages

• Higher cost (frequent transactions generate more expenses).
• The risk of underperformance is higher (it is more difficult to succeed).
• It requires time, experience and knowledge to obtain optimal results.
• Higher tax burden due to multiple transactions.

Passive management: advantages and disadvantages

Advantages

• Low cost due to the lower number of transactions.
• Diversification of the investment portfolio (reduces risk).
• Predictable and transparent returns.
• It requires less time and effort.
• Less risk of underperformance.
• Better tax treatment.

Disadvantages

• Its profitability does not exceed the market.
• Its evolution is exposed to all the elements that make up the market index.
• Its rigidity prevents it from responding quickly to economic developments.
• The investor cannot control or personalize his investment.

Trust your real estate investment in Muppy

Whatever your way of investing in real estate, at Muppy we pave the way for you when it comes to optimizing your economic performance. Identify your ideal strategy with our comparative active investment vs. passive investment and leaves its management in our hands. Join our real estate portfolio of more than 800 homes now and benefit from a winning strategy.

FAQs

What to consider when choosing between active or passive investment?

Your investment profile will be what determines which of them is most recommended for you. The expected profitability, the time horizon, the risk tolerance, the available capital and the taste for investments are among the main factors to be considered.

What is the most suitable strategy for beginner investors?

If you are starting out in the world of real estate investments, the most prudent thing would be to opt for passive management. However, active investing can be a good option if you delegate it to a trusted manager.

Which strategy offers the highest performance?

In principle, you might think that active management is synonymous with the highest profitability. However, this is only true in the short term and, no matter how much experience you have, it is not always easy to beat the market. In the long run, passive investing is always more profitable.

Can I combine active investment and passive investment?

Combining both strategies is not only possible, but also highly recommended. In fact, this is an upward trend among real estate investors. Thanks to it, you can balance the advantages and disadvantages of active and passive investing.

How does the economic situation influence the choice of one or the other strategy?

Active and passive investments are affected differently by times of crisis. In periods of uncertainty and volatility, the ideal is to opt for active management. In economically stable times, passive investment is a good choice.

How is active and passive investment taxed in Spain?

The taxation of both investments is similar because our tax system considers them as capital gains. His personal income tax rate ranges from 19% to 28%. However, the transfers of passive management have a more beneficial treatment (they enjoy tax deferral and are taxed only when they are definitively reimbursed).

Which of these strategies requires the most initial capital?

Active management requires a higher investment than passive management. After all, this usually consists of acquiring ownership of a property, covering associated expenses and, eventually, carrying out renovations (€230,000 on average). Against this, € 100 is enough to invest in real estate investment funds.