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Figuring Out If You Are a Better Active or Passive Real Estate Investor

Active or passive investing in real estate in a great vehicle for anyone. But this especially goes for doctors.

The truth of the matter is that high income earners, like physicians, will need to invest above the limits of the tax advantaged investment accounts available to them, like 401k’s, 457’s, and cash balance plans, to reach their goal nest egg for retirement.

Beyond these tax advantaged investing accounts, there are a lot of other investing options out there.

These include:

  • Real estate
  • Taxable investment accounts
  • Angel investing
  • Cryptocurrency
  • SPACs
  • Collectibles

Of these, obviously the first two are the most recommended.

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And while I do invest a small amount in a taxable investment account, real estate reigns supreme of these options in my opinion.

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And I truly believe that all doctors will benefit from investing in real estate.

However, this is not something I usually need to convince physicians of

Instead, they get hung up on figuring out what is the best way for them to invest in real estate.

And there are two main flavors: active or passive real estate investing. Both are good options. In fact, many investors use both active and passive real estate investing. But the fact remains that we all have to start somewhere.

So, how can doctors decide if active or passive real estate investing is best for them?

Well, that is exactly what I am going to try to help you do in this post!

active passive real estate investing

What I recommend you do is read through the entire post. Review each scenario that I throw out there. Tally up how many apply to you for both active and passive real estate investing. See which category has more.

And then use this information to help you make this decision and start taking concrete steps to make it actually happen!

Let’s get started!

Active real estate investing is likely a better for for you if…

…wait for it…

…you are look to accelerate your wealth building the quickest

The fact of the matter is that the bulk of the money and wealth building in any real estate investment will go to those putting in the active work. Even with passive real estate investments, there are general sponsors putting in active work. And they gain the lion’s share of the wealth from the investment.

This doesn’t mean that the limited partners, or passive investors, don’t make money. They can if the investment does well. It’s just not as much.

With active real estate investing, especially when scaled up as I show here, you wealth accelerates much quicker.

So keep your timeframe in mind when figuring out if active or passive real estate investing is the best place for you to start.

…you like to be in control of your own investments

Control can be both good and bad when taken to either extreme. With active real estate investing, you are in control of your money. Even if you hire a property management company to oversee the day-to-day operations, you make the final decisions.

On the contrary, with passive real estate investing, you hand your money to the general partners. From there on out, you are out of the control seat. They make the decisions that impact your return. You also cannot pull out your money at any time.

Again, this is not necessarily bad. But it can be unnerving for those who like control.

…you like to get your hands dirty

I mean this is two ways:

  • You like to learn new things and
  • You like to be actively involved

I fall into this category. In my mind, learning about how to buy, build, manage, and sell real estate is fascinating. And I also like to learn about how to fix certain things. That doesn’t mean I fix (at this point) any of the maintenance issues that arise. But I like to know I could.

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And it also helps me learn to fix things around my actual house.

…you want to minimize your tax burden

Real estate investing in general carries many really nice tax advantages.

However, investing actively in real estate will give you or your spouse the best opportunity to achieve Real Estate Professional Tax Status (REPS). This will allow you to write off passive real estate losses against your active W2 or 1099 income. If you are interested in learning more about REPS, this is a full guide for physicians.

This creates a huge tax advantage that is much tougher to achieve (some might say impossible) with only passive real estate investing.

I’ve been very open in saying that I don’t think tax reasons should dominate your decision to invest in real estate or not. But if this is very important to you, it may help sway your decision between active and passive real estate investing.

Now, let’s move on to passive real estate investing!

Passive real estate investing is likely a better for for you if…

…wait for it…

…you are terrified to the midnight toilet call

The midnight toilet call is actually a myth. But, this is to say that passive real estate investing is more for you if you really want to be 100% hands off. Like you don’t even want to occasionally have to deal with your property manager updating you on your investment property.

If this is the case, then passive investing is an excellent option for you. You will need to do your due diligence on potential investment opportunities like these. Then, invest your money into the project with its general partners.

And then do nothing. If the investment makes money, you make money. If it doesn’t, you don’t.

But you do not need to be involved at all.

…you have passive tax gains that you need to offset

I mentioned before that you cannot count passive real estate losses against active income without achieving REPS tax status.

However, you can count passive real estate losses against passive gains at any time without any special tax designation.

Therefore, if you have large passive gains, investing in real estate is a great way to offset them. In fact, even if you just expect to realize a large passive gain in the future, you can carry passive real estate losses into the future to offset them.

You could do the same thing with a active real estate investing without achieving REPS. But investing in passive real estate investments makes this a bit easier for sure.

…real estate investing really makes you nervous

Real estate investing does seem really scary at first. I definitely felt this way. After Selenid and I had out first offer accepted, we had what we call our “OH SH!T” moment. And you can see how that first investment property has turned out here.

Eventually, you keep going and learn and experience things and it gets much less scary. Even fun.

However, if you are just really nervous about real estate investing, passively investing is a great way to start.

Find a sponsor (i.e. general partner) of a passive investing opportunity (like a syndication) that is education focused. Learn from them . Learn about their opportunities. If one seems to fit, invest in it. Make sure you invest an amount that you are okay losing to make it even more palatable.

This way, you can finally “get over the hump” and get started. My guess is that you will find it is not as scary as it seems. And then hopefully this experience can propel you to become an even more savvy active and/or passive real estate investor!

It’s like a gateway drug…but in a good way.

…you live somewhere that is not conducive to active investing

I invest in real estate locally in Buffalo, NY. And while investing from a distance is possible and can be done very well, it comes with additional challenges.

So, if you live in a place like LA or NYC where investing actively in a local property is very difficult, passive investing can be a great way to gain real estate exposure in your portfolio.

What factors do not make the cut?

I really spent a lot of time on this post determining the most important factors in this decision.

There were others I considered. Like the amount of capital that a potential physician investor currently has. But in the end, I really don’t think this is a determining factor. Investing takes money. Physicians need to save money to invest if you want to improve your financial well-being. And the entry points are not that different.

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So, this factor among others did not make the cut.

I really believe that those listed are the most important to consider as you decide whether active or passive real estate investing is best for you as a doctor (or even otherwise).

Which is better?

I was recently asked to compare returns with active versus passive real estate investing.

Unfortunately this is just impossible to do. They both can do really well. And bad deals go bad both actively and passively.

So it’s more about what best suits you than which is “better.”

So where do you fall on the active or passive real estate investing spectrum?

There is not a right answer.

There is only the right answer for you.

In starting this post, I said that real estate investing is a great investment vehicle for all doctors. And I stand by that. It’s not to say there are no downsides. There are downsides. But they are worth it. I have seen how real estate investing has changed my financial well-being and wealth for the better. You can see as well in my net worth updates.

So really the question to consider in my mind is not if it works for you. But rather, how can it work for you?

Take some time to think over the factors I’ve included here and see what is best for you!

Then, once you decide what type is best for you, my guides for active real estate investing and passive real estate investing will help you figure out how!

If you are looking for more personal guidance, my course, Graduating to Success, includes hands-on modules on both active and passive real estate investing for a fraction of the cost of other courses!

What do you think? Are you more of an active or passive real estate investor? Why? What holds you back from starting if you haven’t yet? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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