Should you be a Passive or Active Investor?
One of your first considerations as a property investor, and perhaps your most important decision of all, is to choose what type of investor you are and / or want to be.
A passive investor is someone who will typically buy a property and hold it for long term investment purposes (10 to 15 years and longer), and prefers not to have to be constantly involved in the ongoing management and maintenance of the property. This isn’t because of their disinterest or lack of knowledge, it is often a path taken by professionals and other busy people who may be quite knowledgeable investors but who are time-poor, and who realise that it makes more sense to engage other specialists to provide these services.
Passive investors are therefore usually best served by buying new or near-new properties for investment, as the buying decision is often more straightforward (easier to compare properties), they are generally more attractive to tenants, have lesser maintenance issues arising, and you would not expect to incur any major maintenance or renovation costs for at least 8 to 10 years.
An actively involved investor, on the other hand, is someone who may prefer to buy a property with a view to being able to improve the property in the shorter term and perhaps to then sell for a profit (‘flipping’). They may prefer to be more hands-on with any maintenance or renovation work, either in doing the work themselves or at least in taking an active role in managing work contracted to tradespeople such as cabinetmakers, electricians and plumbers.
Active investors may also undertake property development strategies such as splitting of large blocks into two or more titles, and demolishing old and rebuilding new homes or apartments (dependent on local authority requirements) on the land.
Major risks affecting active investors can include transaction costs (i.e. stamp duty, agent’s fees) when you buy and sell within a quite short timeframe, over capitalising on a property, and holding costs (i.e. how long your capital is tied up in holding the property without generating any income whilst awaiting development approvals, completing repairs, renovations, or a new build, or preparing for sale, taking to market and selling, and settling the sale – especially if you are using borrowed funds). Don’t ignore the possibility that the market can move against you, or other uncontrollable factors such as a change in local or national economic circumstances occurs, adding further to the risks involved.
What is best for you?
Both can work well, both have their risks.... A passive investment strategy is, by its nature, a lower risk strategy. You need to be comfortable with your chosen approach. It is of course possible to use a passive approach for some properties and an active strategy for others.