Many of the stories you hear about real estate investing refer to it as a way of building a passive income stream. There are other people who insist that it is very much an active income source. You may be thinking, “Why is this even important?”. Let’s dig in a bit and see if we can figure it out.
Here is how I am going to break it down:

1. Define a Passive vs Active Investment
2. Is Real Estate Investing Passive or Active?
3. Why is this an important distinction?

Define a Passive vs an Active Investment

Before I discuss whether real estate is a passive or an active investment, I want to make sure what these investment types are. Here are some quick definitions.

1. Active Income Source: Income is earned as a direct result of your day to day involvement with the business. A standard 9-5 job is the prime example of an active income source.
2. Passive Income Source: This is a source of income where your involvement is not required on a regular basis to generate income.

Is Real Estate Investing passive or active?

As I mentioned above, many people think that real estate investing is a source of passive income. From my own experience, I would say that it is actually an active income source. I think it is likely that the actual answer falls somewhere in between, and may shift depending on your personal experience.
If I were to leave it at that, it would be a huge cop-out, so lets look at what factors make real estate investing passive or active.

Passive Income Factors

There are a number of reasons people thing that real estate makes a good passive income source. Here are the ones I think make the best case:

• Rental income – This is the primary reason that people think real estate is a passive income source. Once you have signed a lease, you should have a check arriving every month from your tenant.
• Minimal Expenses – Once you have leased a property, your expenses other than a mortgage, taxes and insurance, should be minimal, as they would transfer to the tenant.
• Long-term tenants – If you have a tenant for a long time, a level of comfort usually develops to where there is less need for your involvement. If it is a good tenant, most problems get solved quickly, and few things crop up on an ongoing basis. They generally pay their rent on time, so you don’t have to follow up to ask for it.
• Time Investment – Most people feel, and in general it is true, that for any given property, the time involved for maintenance, searching and bringing in tenants, and managing finances, is far less than needed for full-time employment. The more you automate expense payment and maintenance needs, the more you can minimize your involvement and thus make it more passive.
• Property Managers – If you have a property manager handling your real estate, then your time investment may become even more passive. If you have provided clear direction and procedures for your management company to follow for various situations, then there is less need for your involvement.

Active Income Factors

Just as there are reasons that real estate is a passive income source, there are also a number of compelling reasons that it is actually a very active source of income, meaning you need to be more involved.

• Number of properties/units that you own – This may be the most basic reason that real estate becomes a more active investment. The more units that you have, the more likely it is that at any given time, a problem will crop up, or you will have a vacancy that needs to be turned around, or a rehab that is occurring. If life would cooperate, these would all synchronize and happen all at once, then you could deal with them and move on, but it doesn’t generally work out that way.
• Self Managed Properties vs Property Manager – If you do the management of your properties yourself, rather than hiring a property manager, you will spend more time on the process. Instead of simply being able to answer questions and issue orders, you will be doing all the various management activities on your own. This applies especially in the case where you are just getting started with property management and perhaps don’t have many standard operating procedures and workflows in place.
• Significant Maintenance/Rehab needed – If you have properties that need a lot of rehabilitation work to be completed, then you will need to be more involved. If you are rehabbing a property and have specific ideas for what is being done, you will need to keep a close watch on the work being done.
• Problem tenants – If you have tenants that give you issues, and potentially require legal intervention, for example, an eviction, they are going to take more of your time. This may be true even with a property manager as they will still require your approval in certain situations to outlay money for legal or other advice.
• Hands-on Personality – If you have the type of personality where you want to be involved or have a say in all of your investments, then real estate investing can definitely be an active investment. This could range from being more involved with the day to day management of your properties, to taking a position on a home owners association (HOA) board if one of your properties has one. You can really choose how much time you spend in these situations, but they have potential to be significant amounts.

It really isn’t one or the other, but both

As I alluded to before, I don’t think it is possible to classify real estate investing as a purely passive or active source of income. There are aspects of it that fall in each category. The amount of time that you choose to put in to management will determine what the income source is.
It is possible that as you get more experienced, your level of involvement may decrease on a property by property basis. This is because you may put SOP’s into place and have defined work-flows that do not require as much of your input anymore.
On the other hand, you may become more involved as time goes on. This could be due to having more properties, and thus having more management to deal with on a regular basis.
It could also be that as you become more experienced with managing real estate, you see that there are areas where you want to be involved more. This rings true for me in the case of an HOA. I was not very involved with the property until it became clear that the management of the HOA was not very good. The security of the finances of the complex were in jeopardy and thus my individual investment was at risk. For this reason, I chose to become a member of the board, and it has become very much an active income source for me.
The last story also brings up an important point that no one is as interested or cares about your property as much as you do. The more control you want to have and the more you want your property to succeed, the more active a role you will have to take.

Why does it matter

This question should come up as part of your decision about investing in real estate. As with any investment, you want to look at the pros and cons to see if it is right for you. Depending on your temperament and time availability, and how much you see yourself being involved with the real estate management, could help you decide that real estate is appropriate for your investment portfolio.
If you think you will want to be more involved in the management of real estate, but don’t have the time to commit to that, you may consider investing in a real estate investment trust (REIT). This is essentially a fund or group that funds real estate purchases that are managed independently. From the investor point of view, it is like investing in a mutual fund, except it is not stocks or bonds, but shares of ownership in property.
On the other hand, if you have some available time, or would be willing to find time to work in management, then real estate may be appropriate from an active vs passive income point of view.

Recap

Let’s do a quick review of what I discussed, then bring this to a close.
Passive vs Active income is determined by how much involvement you have in earning the money at any given time. The less you are involved while still having income, the more it becomes a passive source.
Real estate investing generates income that falls on a continuum of passive to active depending on a number of factors. These include:

• Whether you manage the property yourself, or use a property manager
• The amount of automation you have introduced into your management procedures
• How long you have been doing real estate investing
• How many investment properties you own
• What sort of tenants you have
• Existing rehabilitation and maintenance needs
• Proximity to your properties
• Personal risk tolerance

These factors are all important either before you invest in real estate, or if you are already invested because they affect your profitability. If you are able to put little time in the investment and have it run smoothly and profitably, then the income may be passive. If you have more time or want to be involved, the income will definitely be actively earned. Either way, real estate has to be managed, and treated like a business. Your interest and abilities will determine the success and thus profitability of the investment.