"Not all real estate investments are created equal. Passive income isn't just about owning property, it’s about choosing investments that truly work for you, not the other way around."

Rise Capital Investments

Real estate has been our ultimate wealth-building tool, but not all investments are created equal. Understanding the difference between actively managing a property to set up residual income and earning truly passive cash flow is essential to making smart investing decisions. We break down the key distinctions and reveal what counts as real investing versus running a business, then show you how to align your strategy with your financial goals—whether you decide to hustle hands-on or prefer a hands-off approach. Don't get in over your head without knowing the truth first!

1. WHAT IS INVESTING ANYWAY?

At its core, investing means allocating money, time, or resources into an asset with the expectation of generating a return over time.

This could come from interest, dividends, or appreciation in value. The fundamental aspect is the assumption of risk in exchange for the potential reward. This could be investing in a yourself, a job, a business that you own, really anything. The danger comes from thinking all investing is passive investing. There's a huge spectrum of how much work on your part an investment will take.

Investing in Real Estate

In the context of real estate, investing typically involves acquiring, financing, or otherwise controlling properties to generate returns. These returns can be in the form of rental income, profits from property sales, or increases in property value over time.

However, there is a misconception outside and sadly even inside the industry that real estate income is passive. Very few activities related to real estate qualify as passive, just being a real estate agent investing in their own business is not passive. Some strategies require an active, hands-on approach, while others allow for more passive income generation by investing your money without managing a business.

2. ACTIVE INVESTING MEANS YOU'RE THE BOSS

Active real estate strategies involve direct participation in the day-to-day operations and management of properties. These approaches can be profitable but often require substantial effort and time commitment. Here are some common forms of active real estate investing:

Wholesaling Properties

Wholesaling involves finding distressed properties, securing them under contract, and then assigning that contract to another buyer for a fee. The wholesaler does not actually purchase the property but acts as a middleman. This strategy requires a keen eye for deals, excellent negotiation skills, and the ability to quickly match buyers and sellers. As a result, wholesaling is more like a transactional business than a passive investment.

Fix-and-Flip Projects

Flipping houses means buying properties, renovating them, and selling them at a higher price. While potentially lucrative, this approach involves significant risks such as construction delays, cost overruns, and market volatility. Successful flippers must manage contractors, oversee renovations, and coordinate sales, making this more of an operational business than a passive investment.

Because I specialize in value add multifamily properties, I hit a limit on how many I could hold at once, which limited my wealth-building potential. These are the "slow flips" of the investing world requiring vigilance and ongoing maintenance even with a property manager. Frequent meetings, site visits, problem solving, decisions, interventions, and more. Distributions when there are any go straight to the investors, so large commercial properties are typically not a good source of cash flow to the general partners. All these combined put commercial managing ownership squarely in the active income category, and usually delayed income at that.

Managing Rental Properties

Owning rental properties may seem passive, but when investors self-manage, it involves tasks like finding tenants, handling maintenance issues, and collecting rent. These responsibilities make rental income more of an active business operation unless property management services are outsourced. This is especially apparent when running a short-term hospitality property with frequent turnover, facility maintenance, and staffing needs.

I self manage many of my smaller properties because to justify my "real estate professional status" for tax purposes, I must be involved in the management of the sources of my rental income that the IRS identifies as passive income. I assure you, is not.

Real Estate Development

Developing real estate entails constructing new properties or redeveloping existing ones. The process requires significant involvement in project management, permitting, financing, and construction oversight. Real estate development can be highly profitable but also carries the risks associated with long timelines and complex logistics. It's akin to running a construction business rather than making a straightforward investment.

Our biggest flagship project was an 8-story high rise apartment building in downtown Salt Lake City that we sold at shovel ready to our general contractor and is now nearing completion. (My architect does assert that it's putting the first story underground means it's technically 4 inches under "high rise" to get our permits.) I brought on many partners for this deal, and it consumed most waking moments for over a year. To date one of the most stressful experiences of my life. Worth it financially, and because I'm a sucker for "before and afters" I'll likely do it again someday, but I still carry scars I don't recommend to other investors unless they are driven by a deep passion for creating buildings for the people who will live and work in them.

Before...

After (during?)...best and worst decision of my life.

3. IS YOUR PASSIVE INCOME REALLY PASSIVE?

Passive real estate investing can provide income without active day-to-day management. However, not all passive strategies are the same. They can be divided into residual income, which requires initial effort and some ongoing oversight, and limited partner income, which involves purely financial participation without any management responsibilities.

Mix it up for multiple streams of income and time spent.

Residual Income: Setting Up and Maintaining a Business

Residual income results from setting up an investment that generates a stream of cash flow with some ongoing maintenance. This might involve initially setting up rental properties, renovating them, and hiring a property management company to handle day-to-day operations. The investor remains involved in strategic decisions, such as budgeting for capital improvements, setting rental rates, or choosing property managers.

Other residual income approaches in real estate include self-storage facilities, commercial properties with long-term leases, and joint venture partnerships. While not requiring the same level of active participation as wholesaling or flipping, residual income strategies still necessitate oversight and management at certain stages to ensure the income stream remains stable and the investment performs well.

Joint ventures (JVs) offer a way to invest with less work by sharing responsibilities with partners, but they still involve a level of stress and effort. In a JV, you maintain some control over the project without handling every detail alone. Duties are divided based on expertise, making it easier to manage tasks like renovations or leasing while sharing the load.

However, decisions still require partner collaboration, meaning you don’t have full control. There’s shared risk, and the need for agreement can add stress, especially when preferences differ. For investors who value spending time with loved ones, JVs strike a balance between being actively involved and enjoying more freedom than traditional active strategies. There are rules about joint ventures and "silent partners" who only put in money, so be sure in your joint venture that everyone has a legitimate role beyond just capital.

I often use joint ventures to get a deal moving, leveraging my skills in closing and renovations. Once the property is stabilized and generating cash flow, I step back and let a long-term partner manage the day-to-day. I look for partners who complement my weaknesses, ensuring everyone brings something unique to the table, but with some overlap for flexibility. After refinancing, I prefer to step down as managing partner and transfer some equity to another partner who takes on that role.

I love construction, I hate maintenance.

Limited Partner Income: Truly Passive Investing

On the other hand, limited partner income is generated when an investor places money into a real estate deal managed by others, without direct involvement in its management.

Truly passive income is only derived from a business that you partially own through shares, but that you do not run!

This is how the stock market works: no one is asking us to show up and give our opinions in shareholder meetings or looking to us to solve issues when they go wrong. That is passive income, and can be achieved in real estate businesses as well by becoming a limited partner.

Although as limited partners we must still conduct research, evaluate, and monitor each investment in our portfolios, it’s important to note that these efforts are for the sake of portfolio management and does not directly influence the operations or outcomes of the underlying investment. The limited partner's role as defined by the SEC is to remain hands-off regarding the management, success, or failure of the business itself.

This type of income is usually found in real estate syndications, funds, or REITs, where the investor benefits from cash flow and appreciation while the general partners or fund managers handle all operational responsibilities.

In these arrangements, the general partners (GPs) handle the active management tasks, while limited partners (LPs) enjoy the benefits of real estate ownership—such as income and tax advantages—without any management duties. This type of passive investment suits individuals who prefer steady, predictable returns with minimal effort.

4. COMPARE STRATEGIES AND FIND YOUR SWEET SPOT

Level of Involvement

Active strategies demand a significant time commitment and ongoing engagement, while residual income strategies require initial effort with some occasional maintenance. In contrast, limited partner investments allow for a completely hands-off approach.

Control and Decision-Making

Active and residual income approaches offer greater control over the investment's success, which can be positive or negative depending on experience, whereas limited partners delegate all management duties to the general partners or fund managers.

Risk and Reward

Active strategies may provide higher returns due to the ability to earn money from trading time for dollars by managing risks and opportunities, but they also expose investors to more variables and stress. Residual income can offer steady returns with intermittent effort, while limited partner investments deliver predictable income and lower risk, making them ideal for capital preservation.

Think of these strategies like raising children at different stages:

• Active investing through your business is like having a newborn—demanding constant babysitting with attention and energy, and unpredictable challenges pop up at any time.

• Residual income is more like having a teenager—less hands-on but still requiring guidance and check-ins to keep things running smoothly. We start out with a newborn knowing and hoping they'll someday become a little less work. We never know when teens will need us, but when they do we must be on-call for either no big deal or a major disaster!

• Limited partner investments are our grown children who have moved out—there when we need one another, but they mostly manage themselves, allowing us to not be in control hopefully enjoying the fruits of their labor! Just like great parents who value spending quality time with loved ones above all, limited partner investments can offer the ideal balance of steady returns and peace of mind, letting you focus on what truly matters: building relationships and giving back to your family and community.

Because I am an active real estate investor running a business, I often get sucked into seeing more $ signs from trading my time for money and want to get in on the management side. It's exciting seeing new deals and properties come together, to be involved in the creative side of the business, to help change families' financial lives. I bite off more than I can chew and remind myself to mix in more totally passive investments. I've had to create some boundaries for myself. This allows me to be very picky of projects that take my time, as well as projects needing my money, and helps me design our flexible lifestyle.

What can I say? I like to diversify!

5. WHERE DOES RISE CAPITAL FIT INTO THE INVESTMENT LANDSCAPE?

At Rise Capital, we are active participants in the deals we manage, whether as lead partners or co-partners (where we take a smaller ownership stake alongside other groups). Our approach involves direct management of real estate projects, handling the operational responsibilities and strategic decisions needed to make each investment successful. While our work is not passive, we create a passive experience for our investors.

Private Lending as a Passive Investment Option

Our main focus is debt investing, also knows as private lending, through a fund that provides short-term real estate loans, offering returns to our passive investors in the 10-12% range. This strategy allows our investors to benefit from steady income without taking on any active roles. We handle all the loan due diligence, originations and servicing, borrower management, and risk assessment, ensuring a completely passive investment experience for our limited partners. All investors need to do after their initial investment to approve rolling over into additional loans is sign the disclosures for each new property. We request original contributions be committed for 2 years, and gains can be either rolled over into new investments or withdrawn back into a bank account or self-directed IRA custodial account.

Occasional Equity Deals for Added Growth Opportunities

In addition to private lending, we also offer equity investment opportunities in select projects. In these cases, we share both profits and losses with our investors. Because equity investments involve profit-sharing, they carry higher risks but also offer the potential for greater returns through capital appreciation in the form of profits.

While we as Rise Capital managers actively manage these investments, our limited partners enjoy a hands-off experience, receiving passive income distributions without any operational involvement.

Earned Income from Fees

We also earn active income through various fees:

• On hard money loans, we collect 2% origination points from the borrower, providing us with additional income while covering the cost of servicing the loans.

• We have the ability to charge fund expenses to investments, which we currently apply to equity deals to cover specific costs. Although this could extend to debt investments, we do not currently implement such charges on the lending side.

By taking on the active roles, we make it possible for our limited partners to earn passive income through both debt and equity investments without having to manage any day-to-day responsibilities.

The link says it all → partnerwithrise.com

6. FINAL THOUGHTS ON CHOOSING YOUR BEST LIFE

Whether you're seeking active engagement or a truly passive experience, real estate offers a range of opportunities to fit your investment goals. Active investors may prefer the hands-on control of flipping, development, or self-managing rental properties, while those looking for passive income may benefit more from private lending, funds, or limited partnerships.

At Rise Capital, we provide opportunities for passive income through private lending and carefully selected equity investments, making real estate investing accessible for those who want to earn without the complexities of active management.

Don't make the mistake of confusing active with passive investing. Get clear on your financial and time goals, and choose projects accordingly with eyes wide open.