09. How to invest in real estate in Spain
If you’ve decided to invest in real estate – and there are good reasons to do so – it’s essential to know that there are two major possible strategies. In this article, we’ll explain what active and passive real estate investment entails, how these concepts relate, and which one might be the best option for your financial goals.
The distinction between active and passive management is common when discussing investment funds. In the world of investment funds, active management involves active decision-making by professional fund managers with the goal of outperforming the market. These managers actively select and adjust investments in the portfolio, which often results in higher management fees.
On the other hand, passive management seeks to replicate the market’s performance and minimize costs by investing in a diversified portfolio of assets, such as stock indices, rather than making active decisions. This strategy tends to be more cost-effective for investors and has consistently shown to outperform active management in terms of net returns after fees.
But how do these differences apply to real estate investment?
Active Real Estate investment
In the real estate sector, active investment resembles the active management of funds, where investors make decisions and manage properties directly. In contrast, passive investment relates to investment strategies in diversified real estate vehicles or collective projects, similar to passive fund management. Essentially, there are three ways to actively invest in the real estate sector:
- Property rental: In this approach, investors acquire properties, such as apartments or houses, with the aim of renting them out. As prices and rents increase over time, this strategy can provide passive income.
- Property flipping: The “house flipping” strategy adds an extra twist to active real estate investment. It involves buying distressed properties, renovating them, and selling them quickly for a profit. However, it requires in-depth market knowledge and a significant initial investment.
- Real Estate trading: This strategy entails buying properties with the intention of selling them at a higher price in the future, capitalizing on the increase in real estate market value.
Active real estate investment offers interesting advantages: it provides greater control over investment decisions and property management and has significant profit potential if done correctly. However, as mentioned, the main disadvantages are the costs and the level of knowledge and dedication required from the investor.
Passive Real Estate investment
In contrast, passive real estate investment resembles passive fund management. Investors do not directly participate in property management but rely on professionals or engage in collective investment vehicles. In this case, there are three major ways to carry out passive real estate investment:
- Real Estate investment funds: These funds specialize in the real estate sector and generate returns through dividends or the sale of shares.
- Real Estate Investment Trusts (REITs): Publicly-traded Real Estate Investment Trusts operate in the stock market and acquire, develop, and manage real estate assets.
- Real Estate crowdfunding: Real estate crowdfunding brings together multiple investors to finance real estate projects. It is an accessible option with controlled risk.
Among the key advantages of passive real estate investment are the following:
- Reduced Time Commitment: It requires less time and management effort, allowing you to diversify your portfolio.
- Automated Diversification: You can invest in a variety of real estate assets without directly managing the properties.
The primary drawback of this form of real estate investment is reduced control: similar to passive fund management, you cede direct control over properties to third parties.
Active or passive investment?
The choice between active and passive real estate investment will depend on your goals, resources, and preferences. Active investment offers greater control and profit potential but also demands a time commitment and expertise. On the other hand, passive investment is less demanding in terms of time and effort but involves reduced control.
It’s important to recognize that passive real estate investment provides options for a wide range of investors, from those with ample knowledge and resources to those seeking a more accessible entry into the real estate market. The choice between the two depends on your personal profile and goals.
The key is to understand the differences and select the strategy that best suits your needs. As an investor, you can explore various options and, as mentioned in the video, consider real estate crowdfunding as an intriguing way to diversify your portfolio and access real estate investment opportunities. Whatever you decide, diversification remains a fundamental pillar for success in the world of real estate investment. Invest wisely!