What's Better? Active or Passive Real Estate Investing? | Ep 24

James: Do you want to do the

Jessi: intro? Yeah, I could do the intro.

James: Sweet, do it.

Jessi: Welcome to the Furlo Capital Real Estate Podcast where we dive into the intricacies of passive real estate investing. Our mission is to Yes. It's to equip people to invest in properties and people so that together we can improve.

Yeah. Wise wisdom is good. So together we can improve housing.

James: Yeah, there you go. That's pretty good. And make some money, build some wealth.

Jessi: And Oh, I'm Jessi and this is my husband, James.

James: Oh my gosh. I didn't actually think of the intro.

Jessi: That's okay. You were coaching me.

James: Yeah, that's right. We're

Jessi: coaching me.

So that was good.

James: Yeah. What I really was thinking about was a previous podcast. So so a little insidery information here on what I do. So when I produce the podcast, so we record it and then I go off and I do the editing and I do all the other stuff around it. Part of my workflow is to take the transcript.

that is created from this, throw that into chat GPT and simply ask it what questions might a listener have after listening to this podcast?

Jessi: That's so interesting,

James: right? Yeah.

Jessi: Okay.

James: And, and then I'll actually, I actually asked like four different questions to try to It's just, I'm trying to generate ideas for our conversations.

Right. It's like another one would be like, well, what unexpected connections or questions might somebody have?

Jessi: Huh.

James: And then another one's like, what's a controversial thing that someone might say based off of this? And then what are some myths? That people might have based off of this. And so, yeah, yeah, dude, I'm a, I like to generate ideas.

Jessi: Generates lists for you of all those different things. So we

James: did a podcast that was all about tenant screening.

Jessi: Okay.

James: Yeah. And so that was, I was doing that one. I remember. Asked that question. And one of the things that it said was, What advice do you have for investors who are undecided between passive and active real estate investing?

Because we kind of made a big deal, right? Like, dude, if you're just having to go active, like,

Jessi: yeah, there's a process that you should follow. And yeah, and

James: so it turns out that's not the only thing. I just thought it was the right question. So I wanted to dive into that today. So We're gonna start super simple here.

What is the difference between active and passive investing? Do you know? I'm, I mean,

Jessi: yeah, it,

James: you're kind of a passive investor these days.

Jessi: These days I'm passive. Yeah. Cause I, I would define it as an active investor has their hands like in the mix of things. So they're making decisions. They're either doing projects, they're interviewing tenants, they're,

James: yeah,

Jessi: they're doing things.

James: Yeah.

Jessi: Passive investor. Maybe knows about the property, but really is more just providing funds to be able to do deals. Yeah,

James: that's fair.

Jessi: Yeah,

James: that sounds good

Jessi: They're not managing the property.

James: Yeah, and it's not binary There's definitely a sliding scale like you could have someone who I bought the place, but then I hired a property manager

Jessi: Yeah,

James: and it's like 80 percent passive.

Jessi: Yeah,

James: potentially

Jessi: makes sense

James: kind of depends

Jessi: Yeah, there's different versions of it.

James: Yeah at the end of the day I say the big difference is about control, right? And so I've, I did the research and I made this really big table here. And so, but it says like an active investor has full control over investment decisions, property management, and operations.

Jessi: Okay.

James: Right. Whereas a passive investor has, well, limited control and they're reliant on a syndicator or whoever the borrower is for the management. Yeah. Right. And I would say that's the thing about passive is it's usually you are providing, like you said, providing money in either the form of equity or as debt.

And so those are kind of the main things. And so, yeah, you're dependent on whoever that person is. Yeah. There's some other things. Thanks. As well, that are differences. Who do you think has a bigger time commitment? We're going to start with easy ones. Active investor for sure. Yeah. Yeah. And, and it kind of, it can go up and down, right?

As you know, from us, even as active people, there's times when it's like, yeah, no, like, yeah,

Jessi: everything's kind of running and coming along. Yeah.

James: And there's other times where it's usually around tenant turnovers or around the acquisition side where it's like, Oh, okay. Like this is, there's a lot that needs to happen here.

Which is totally fine. Okay, there's, there's a huge, so, if you're deciding between the two, right, you're like, are you the kind of person who likes control, or is okay with giving up some control? Or at least saying, I'm going to rely on an expert.

Jessi: Yeah, I would want to, I would want to answer some questions.

I wouldn't just give it to anybody. Oh, yeah. If I was a passive investor. 100%. I would want some control over like, Do I know? You have control over who you invest with. Yeah. Right. Yes. Totally. Yeah. Yes. Can I trust them? And are they going to do a good job? But I do have to kind of evaluate like, What does that mean?

To do a good job or not?

James: And the time commitment piece, it's about like, well, how much time do I actually have to, well, commit. Right. To this thing. If you've got a full time job, a full time marriage, and you got kids, and you're doing soccer practice, and I think I just saw a splinter in my finger, and you're doing other stuff.

Getting

Jessi: splinters out of your fingers. Getting

James: splinters out of your fingers, like, you may not have a lot of time to be the active person.

Jessi: Mm hmm.

James: Potentially. Yeah.

Jessi: Or you may just not want to. Like, being active is, can be very physical. It's super

James: fun, is what it can be. It is, it

Jessi: can be fun, but it, well, my point was like, It can be physical, you know, if you're walking to properties or being the person who's scrubbing things or caulking things or, you know, it's like, well, you might like that and you might be able to do that time wise and physically wise, but you may not.

And so, passively, you may want to do it for a different reason. Okay, yeah, that makes sense. You may not want to crawl around on your hands and knees redoing flooring. Who wouldn't want to do that?

James: Some people love it. All right, let's talk about the big one in the room. Okay. Which one requires more expertise?

Active or passive investing?

Jessi: Depends on who you're talking about, I think. Because it's like. Investor.

James: What do you mean?

Jessi: Well.

James: Tell me more.

Jessi: Okay. Okay. Like if I'm, I would say active.

James: Oh yeah, 100%.

Jessi: Yeah, because if I'm doing all the things, huh. and using my money,

James: Huh. I have to

Jessi: know how to do all the things.

James: Right.

Jessi: But if I'm not doing all the things, and I'm just giving my money, I should know at least kind of what you're doing. Yeah. I mean, I would hope

James: Yeah.

Jessi: that people would want to know that. But you don't have to, I guess. Well, you just

James: gotta trust that trust that they do. So let's talk about some of those things that you gotta be an expertise in.

And so, you, if you're thinking about this, And you're undecided. You have to go, are these things that I'm willing to learn?

Jessi: Oh, yeah. Okay.

James: Right? Does that I'm

Jessi: willing to give somebody else my money and trust that they will have done all these things or I'm gonna do it myself.

James: Yep.

Jessi: Okay. Yep.

James: So, I've got a fancy list here.

So the first one, we'll keep it easy, is market analysis. You just gotta understand your local market. And you got to understand some economic indicators, right? Whether like things going up, are they going down? What are interest rates doing? Super fun. Then there's the property acquisition side, right?

Actually getting it. So that is like deal sourcing. You got to know how to find and evaluate potential deals and you got to know how to negotiate Sure. For them, which I think is super fun. Not everyone does. There's just a straight up underwriting, right? How do you calculate your return on investment, your cash flow, your cap rates, and other key financial metrics?

You got to be able to do your due diligence.

Jessi: Yeah.

James: Be able to either walk through a property and see everything or be able to read an inspection report And get information out of it. And ideally you also have your hat on for value add opportunities. Here's how I can make this a good investment by making stuff better.

So like those are all things just in the buying side, right? That's really good to be an expert in. Then there's the financing, right? Understanding. The financial options that you have, whether or not you're doing a private loan or a sub two loan or traditional financing. And that's like residential, commercial SBA agency debt, like there's, there's a couple of them out there.

Yeah.

Jessi: Or creative financing for some of the things that you do, taking seller notes or, Oh yeah,

James: right. Yeah, exactly.

Jessi: Right. You have different things.

James: There's having an understanding of, and this is kind of what we've talked about in the past, like how much leverage and risk am I willing to take with my loans?

How much is being over levered versus not, which kind of, there's not just a straight answer for it. It kind of depends on the project and what you're doing.

Jessi: Yeah.

James: And then there's like just a straight up property or asset management. Right? Tenant relations, you gotta market to them, you gotta fine them, you gotta screen them, you gotta sign rental agreements and hopefully they're legal.

You then have to collect rent, like, and you have to do what's it called conflict resolution. Like all that kind of stuff. And that's huge. Then there's the maintenance and repairs that you either need to be an expert in doing it yourself, which is not that hard thanks to YouTube, or. Get expert at hiring people who are good at it.

I was talking with a property manager today and she was like, Hey, do you know any good handyman? Like the one I've been talking about, like the one she was using was like, was retiring or moving on or something like that. And she was like, I'm just, I'm in the market. And that's like, you gotta know how to do that kind of stuff, which by the way, I had an answer.

It's not here. Try these ones. Or vendor management, right? Working with contractors and service providers, whether that's for lawn care, laundry service, cleaning, all that stuff. Which again, it's not that hard, but you just gotta be willing to be like, all right, I'm gonna learn how to do this and figure out how it works.

You gotta know something about insurance, that kind of thing. And what are different ways that you're gonna mitigate risk, just in general. There is a legal and regulatory compliance piece. Tenant landlord law is a thing. Yeah, you,

Jessi: yeah, you have to know

James: how it works. Yeah. Otherwise

Jessi: you get into trouble.

James: Dude, so many times. And it's, and that's not one of those, like, you learn it once and you kind of like, No. It's constantly changing, in Oregon at least. And so you gotta stay on top of it. There's different building and zoning codes that you've got to be aware of.

Jessi: Can't just start

James: cutting something

Jessi: down and putting something up.

James: Yeah. It's like, I've got a project right now that is under contract and we're looking to close in a couple of weeks. And one of the things that we had to call and learn about was, okay, can we split this lot? And if so, cool. Like, how does that work? And if we want to build an ADU, how would that work? And ultimately we're not going to be the ones to do that, but we're going to sell it to someone else who will.

And so, but we needed to learn enough to become expert enough to say like, okay, this is a thing. You can do it. Here's kind of the process. So you got to know how to do that. There's all just like straight up financial management, budgeting, forecasting, doing accounting, bookkeeping, submitting stuff to your CPA for taxes at the end of the year.

Then you gotta, you gotta have to be an expert in all of that. Then finally, there's some technology that you're going to have to learn how to use. Whether that is accounting software, property management software, whatever, you know market analysis tools, that kind of stuff. And it's like, it's finding them and using them.

So there's, there is a lot just in the expertise side of things, which for me, super fun. Yeah. I love it. And if you're, and if, and what you heard was like, yeah, okay. I think I could do that. And I feel like I got the time to learn them and it seems interesting. Sure. Awesome. Go for it. Do it. Yeah. I would recommend, I mean, you could read books.

That's how I did it. You can watch YouTube videos. I did some of that too. I feel like getting a coach or a mentor is probably the easiest way to do it. I actually do some coaching with people and, and it is to kind of help them just jump forward because there's just a lot of knowledge that you have.

And I was on the phone with a guy yesterday actually, and he, we were talking about, he wants to do a rent increase. He was just like, I don't, what are the rules for this? Oh,

Jessi: so he has a property.

James: Yes. Yeah. Okay. He, he has a, he has one tenant and he's never done a rent increase. It's like, I think it's time.

He has to

Jessi: increase his expertise. Oh man. Yeah. Right. And so

James: that was like, we were going over, okay, here's the letter. Here's what you need to say in it. Here's kind of how this works. Yeah. Here's how you need to post it or deliver it to him. Like all those things.

Jessi: Yeah. There's some rules about all of that.

James: Yeah. Yeah. Yeah. Which is great. Right. And he's learning and he's got the energy and enthusiasm to do it. It's

Jessi: like,

James: perfect. Yeah. Let me walk you through it. But by him essentially having me as a coach he was like, okay, like, here's your answer. And so I'm doing hours of research.

Jessi: Yeah. Okay, finding a coach.

All right, which one?

James: Here's an interesting one. Which one do you think is a higher potential return? Active investing or passive investing? I'm kind of moving on from the other one.

Jessi: Active investing?

James: Yeah. Why do you think that?

Jessi: Help me out. Well, if I'm an active investor, I put my money into the deal and I get it back out.

But if I'm passive, I put my money in, the active investor takes a cut, and then I get some back, but not all of it.

James: That's true.

Jessi: But I get my time, so, and I don't have to do all that expertise stuff.

James: Interestingly, it kind of depends is the real answer.

Jessi: So you could make more money passive investing? Yeah, actually

James: I, I think you could.

Jessi: Interesting.

James: Yeah. For. Two probably more reasons, but for two main reasons we'll say three reasons. We'll say two. So first one is if you passively invest with someone else who is an expert, who knows what they're doing, the property will probably perform well.

Jessi: And,

James: and if they're like, You know, if they're telling you something like, I don't know, it's going to earn a 15 percent internal rate of return, like you could have, you should have good confidence that they have low ball in that number.

And 15, by the way, is a really good number. If you are the individual owner, if you don't have the expertise and you don't put in the time, you may not hit those metrics, at least in the same time span.

Jessi: Interesting. That's been my

James: experience with most investors.

Jessi: Well, I'm thinking like, maybe I'm thinking about this wrong.

I'm thinking like, if If you, the expert, were going to choose between giving someone else your money or investing it yourself, like you'd obviously make more investing it yourself, but you're talking more about the person who really doesn't know anything.

James: Well, they're trying to decide which one am I going to do, go to the passive route or the active route.

But

Jessi: from the very beginning.

James: They or they may have been active for a little while and they're like, okay, I want to scale this thing. Interesting. Or if they've been passive for a while, I'm like, okay, I want to try this on my own now, I guess. Either way. Yeah, because

Jessi: I still feel like if you're going to put in the time and energy and effort, you should be an active investor because then you'll, it seems like you would be able to make more.

James: Here's the other thing. The other part of it is economies of scale. So if you're on your own, you may be stuck, stuck in like the single family home to small multifamily. Yeah. Whereas if you get into a syndication, it could be anywhere from like 30 to 200 units.

Jessi: That makes sense to me.

James: And so, it's just a much bigger pie.

Sure. And so margins are better. Mm hmm. And so, you make more money.

Jessi: Yeah.

James: At the end of the day.

Jessi: Makes

James: sense. But I think it also, like, just the expertise of someone who can manage a big project, and can hire experts full time to do the work, I think also matters. And so, yes, the sponsor does take a cut.

Jessi: Mm hmm.

James: You don't own 100%. There are fees. But it is very possible to actually make more money from a passive one. But I also hear like if you're trying to decide between buying a single family home or going partner with someone else who's buying a single family home, like, yeah, you should like, if you're willing to put in the time and effort, do it all by yourself.

Right. But it's not quite so straightforward. I also think there's a difference in diversification. So let's say you've got 200, 000 to invest. And the likelihood if you're doing it on your own is you're going to put that 200, 000 into one, maybe two properties. Whereas if you're passively investing in other things, like you could go four.

Maybe potentially even five or six depending on their minimum investment amount. So you can diversify a little bit more. And because you're passive, you don't have to just buy near you. You can buy in another state. You can buy elsewhere. So it just gives you further diversification benefits. Which I think is related to another one.

It's like just scalability, right? It's your, if you're going on your own, it's hard to scale because you are limited by your own time and capital and to some extent your own expertise. Whereas if you're investing as passively, like you just just keep looking as long as you still have capital, you can keep looking for people, I guess.

You just, you're a whole lot less limited for it. Let's see here. I wrote a bunch of stuff. I'm trying to decide which one. is important. Which one's not? Like I had one about liquidity, which is kind of an interesting one. Generally, they're both not very liquid because it's wrapped up in the property.

So there's no real advantage there. You can't just sell your ownership no matter which one it is.

Jessi: Right.

James: And some ways it actually might be more liquid if you're active because you can just decide I'm done and just sell it, I guess. So that is what I would think. But yeah,

Jessi: but it still is not instantaneous.

James: Yeah. How about this one? This would be an interesting one. Which one do you think is better for networking and relationships? Or what do you think the difference is for those two?

Jessi: I think if you're an active investor, you're talking to more people who are doing hands on work, vendors and service providers, contractors, tenants.

Yeah. If you're a passive investor, you're talking to active investors and, or you're talking to Other borrowers. Yeah. It's kind of like

James: you're, you're up the stack. Yeah. You're networking mostly with investors, whereas you're active, you're networking most of like, mostly with like contractors, tenants.

Yeah. Yeah. Which I think is kind of interesting. If you think about like you, like that saying, like you're the average of the five people you spend the most time with. So I think that that can kind of matter on your mindset and how you think about things, I think can be interesting. And then finally, what do you think the differences between active Yeah, between in transparency of a project for active versus passive investing.

Jessi: Transparency to whom?

James: To you of the project.

Jessi: Well, if you're active, you know everything. You should know everything. If you're passive you're getting whatever your sponsor tells you. Yeah. Yeah.

James: No, totally.

Jessi: Find a good one that communicates, I guess.

James: So that's another one of those like Okay. So if you choose to be active, you're like, look, I'm going to have full control, which means I get full transparency, but I'm also taking like, it's my time to do it.

You know, for the most part you might hire a property manager, I guess, but still you got to manage them. It's going to require a lot of expertise. The diversification, liquidity, there's some a little bit there. Whereas if you are passively investing, you're giving up some control, but you don't have to invest as much time and you don't have to be as much of an expert, but you also give up on some of the transparency.

You don't know quite as much as what's going on with it. Those are kind of like those big buckets that, that I think about with them. So if you are. Actively investing. Awesome. My next step that I would recommend, but like either buy a book, watch some YouTube, find a coach, like that's kind of one of those three is where I would start.

And usually I'm like, buy a book. And if you find yourself reading the book and really enjoying it, you're on the right track. If you're like. I can't stand this. Okay. We consider passive investing. We consider something else. Yeah. If you are on the passive side, trying to decide like, okay, what is my next step for that one?

I think, well, why is A, you're already doing it cause you've listened to this. So yay. And I would say like, talk to a sponsor, ask them some questions, get to know them. And I've got this entire PDF download that is asked 196 questions that kind of covers eight different areas for a syndication.

And like for me, I'm like, yeah, that's where I'd start. I'd kind of review those and then talk with people and just learn about their projects and what they're doing and just start looking for a good sponsor.

Jessi: Yeah.

James: That would be my, which I'd like to think that I'm a good one. But yeah, that's a, that's the advice that I would give.

I would start to ask questions, right? Just to review one last time I'd be like, okay, what kind of control do you like? I like to be in control of things. But for other things for real estate, I do, but there's other things where I'm like, no, I'm good. How much time do I have to invest in this? How much am I willing to learn about the process?

And those are kind of like the time and expertise are probably like the two big ones. And so depending on what I have, that's kind of the direction that would push people in. Nice. Yeah. So there you go. So if you enjoyed this podcast and learned a ton from it, or even just a little bit , we would repeat. We would appreciate a review wherever it is that you listen to podcast.

And if you'd like to learn more about investing with us, you can check us out online at furlo.com, and we'd love to have a conversation and learn more about your specific needs and what you're trying to get out of investing. So with that, thanks for listening and have a great day