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Passive and Active Investments

Passive and Active Investments

in Blog, Investment Property

Passive Investments

Property investments can be generally separated into two types: passive and active. Active investments are those in which the investor takes full responsibility for all aspects of the investment. This means they source the property they wish to invest in, negotiate a purchase price, are involved in the conveyancing transaction, take responsibility for renovating, selling or letting the property, deal with tenants and maintain the property. In other words, an active investor is in full control of the success or failure of their investment. They commit to their investment or investment portfolio as a full-time job. They put not only money, but time and energy in to getting the most from their assets. While this method of investing can be very rewarding, particularly for experienced and motivated professionals, it certainly isn’t the best sort of investment for everyone to undertake.

Many investors are looking for a more hands-off approach. Perhaps they are looking for an investment opportunity that will allow them to grow a pension, while working a full-time job. Others may have a family to look after, other demands on their time or feel that they lack the experience and know-how to properly manage an active investment. There are a multitude of passive investment opportunities available in the world of property, which are suited to such investors. A passive investment is any in which some or all of the work is undertaken by a third-party and the investor only has to put up the money for the investment. Passive investments range from investment funds to hotel room investments or student lets.

Types of Passive Investment

There are many forms of passive property investment. Some companies will take your money and offer to build and manage a portfolio on your behalf. Investment funds pool your money with that of other investors, then invest either directly in property or in property development companies. Another kind of passive investment comes in the form of managed properties. Managed properties include student accommodation, holiday homes, hotel rooms, French lease-back properties and ski resort investments. In all cases, the investor purchases the property, but then hands over responsibility for maintenance, marketing and tenant relations to a management company. Off-plan investments can also be considered passive investments, particularly if they come with a guaranteed exit strategy.

The Pros:

The main advantage of passive investment is the lack of stress and hassle the hands-off approach involves. Of course, most property investments are going to be long-term, so it is essential that whichever company you choose to control your investment (be it an investment fund, a letting agent or a property management company) is one with a good reputation and with which you can build a stable working relationship. It is necessary to undertake due diligence when selecting passive investments, but once the work has been done and they are happy with the company, investors can typically step back and enjoy the returns with little further effort or input required.

Inexperienced investors entering the market for the first time can benefit hugely from passive investments, as they will receive input from experts. Investment funds and property management companies make a living from controlling investments. They need to know what they are doing and be able to do it well, otherwise their companies would fail. By engaging the services of professional companies with a solid reputation, investors can be sure that they will get expert guidance. Many companies are happy to include investors in communications and meetings, offering advice on the choices they are making and allowing the investor to learn from them.

The Cons:

The risk inherent in passive investments is the lack of control that the investor has over the success of the venture. In a passive investment, the investor must put their faith in the management company or investment fund. The decisions on where to invest or how to maintain or market the property are taken out of their hands. If the company makes a decision the investor disagrees with, there is often little they can do about it. This is particularly true if the money has been pooled together with that of other investors in a fund. If the decision turns out to be bad, the investor loses out. For this reason it is essential to conduct due diligence on any company you choose to work with. Only ever trust well established and reputable companies. Companies with little experience or lacking testimonials from satisfied customers are extremely high risk options and should be avoided.

A further downside of passive investment could come from the establishment of a long-term relationship with a company or fund you turn out not to like working with. Make sure that the company is easy to access and has good customer service. You will need to be able to communicate with them effectively. Chances are you will be working with this company for a period of years, so it is worth making sure that their business practices are one you agree with. Don’t just look at the returns they report. You need to ensure they offer a personable service and terms that you can accept. If they are often rude on the phone or difficult to get hold of, chances are things won’t improve in the future. Be sure only to invest your money with a company you trust and have a good relationship with.

Conclusion For Passive Investments

There are distinct advantages to both passive and active investments. For those with little time or experience, passive investments offer a great opportunity. Care must be taken when choosing the right investment for you and the right company to manage it. If due diligence is completed, chances are that a very successful, hassle-free investment is possible.

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Property Europe Ltd