What Past Recessions Tell Us About the Housing Market

It doesn’t matter if you’re someone who closely follows the economy or not, chances are you’ve heard whispers of an upcoming recession. Economic conditions are determined by a broad range of factors, so rather than explaining them each in depth, let’s lean on the experts and what history tells us to see what could lie ahead. As Greg McBride, Chief Financial Analyst at Bankratesays:

“Two-in-three economists are forecasting a recession in 2023 . . .”

As talk about a potential recession grows, you may be wondering what a recession could mean for the housing market. Here’s a look at the historical data to show what happened in real estate during previous recessions to help prove why you shouldn’t be afraid of what a recession could mean for the housing market today.

A Recession Doesn’t Mean Falling Home Prices

To show that home prices don’t fall every time there’s a recession, it helps to turn to historical data. As the graph below illustrates, looking at recessions going all the way back to 1980, home prices appreciated in four of the last six of them. So historically, when the economy slows down, it doesn’t mean home values will always fall.

Most people remember the housing crisis in 2008 (the larger of the two red bars in the graph above) and think another recession would be a repeat of what happened to housing then. But today’s housing market isn’t about to crash because the fundamentals of the market are different than they were in 2008. According to experts, home prices will vary by market and may go up or down depending on the local area. But the average of their 2023 forecasts shows prices will net neutral nationwide, not fall drastically like they did in 2008.

A Recession Means Falling Mortgage Rates

Research also helps paint the picture of how a recession could impact the cost of financing a home. As the graph below shows, historically, each time the economy slowed down, mortgage rates decreased.

What Past Recessions Tell Us About the Housing Market in 2023 | MyKCM

Fortune explains mortgage rates typically fall during an economic slowdown:

Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.”

In 2023, market experts say mortgage rates will likely stabilize below the peak we saw last year. That’s because mortgage rates tend to respond to inflation. And early signs show inflation is starting to cool. If inflation continues to ease, rates may fall a bit more, but the days of 3% are likely behind us.

The big takeaway is you don’t need to fear the word recession when it comes to housing. In fact, experts say a recession would be mild and housing would play a key role in a quick economic rebound. As the 2022 CEO Outlook from KPMG, says:

“Global CEOs see a ‘mild and short’ recession, yet optimistic about global economy over 3-year horizon . . .

 More than 8 out of 10 anticipate a recession over the next 12 months, with more than half expecting it to be mild and short.”


What Experts Are Saying About the 2023 Housing Market

If you’re thinking about buying or selling a home soon, you probably want to know what you can expect from the housing market this year. In 2022, the market underwent a major shift as economic uncertainty and higher mortgage rates reduced buyer demand, slowed the pace of home sales, and moderated home prices. But what about 2023?

An article from HousingWire offers this perspective:

“The red-hot housing market of the past 2 ½ years was characterized by sub-three percent mortgage rates, fast-paced bidding wars and record-low inventory. But more recently, market conditions have done an about-face. . . . now is the opportunity for everyone to become re-educated about what a ‘typical’ housing market looks like.”

This year, experts agree we may see the return of greater stability and predictability in the housing market if inflation continues to ease and mortgage rates stabilize. Here’s what they have to say.

The 2023 forecast from the National Association of Realtors (NAR) says:

While 2022 may be remembered as a year of housing volatility, 2023 likely will become a year of long-lost normalcy returning to the market, . . . mortgage rates are expected to stabilize while home sales and prices moderate after recent highs, . . .”

Danielle Hale, Chief Economist at realtor.comadds:

“. . . buyers will not face the extreme competition that was commonplace over the past few years.”

Lawrence Yun, Chief Economist at NAR, explains home prices will vary by local area, but will net neutral nationwide as the market continues to adjust:

After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”

Mark Fleming, Chief Economist at First American, says:

“The housing market, once adjusted to the new normal of higher mortgage rates, will benefit from continued strong demographic-driven demand relative to an overall, long-run shortage of supply.” 


What Is A Down Payment On A House?

Throughout the home buying process, you are going to hear many terms that you may not be familiar with, like “comparative market analysis” and “debt-to-income ratio.”

Fortunately, you don’t need to know all of these terms to purchase a home. But there are a few that you should be keenly aware of, even before you talk to a lender or realtor. Here we’ll discuss one in great detail: the down payment.

What is a Down Payment?

A down payment is a payment made in cash at the onset of the purchase of an expensive good or service. It represents a percentage of the purchase price and is not refundable if the deal fell through because of the purchaser.

That said, a down payment is not the whole amount that will need to be settled with your title company at the time of your closing. In fact, you may elect to pay closing costs too.

Down Payment VS. Closing Costs

It’s no secret that there are many hands in the pot when it comes to real estate transactions. At the time of closing, all of these hands want to get paid for the services they provided throughout the home-buying process.

Sometimes you can have your closing costs wrapped into your loan—known as “cash due at closing.” Other times you can negotiate with the seller to pay some or all of the costs for you. But more often than not, closing costs are going to fall on your plate. It is worth noting that the seller and buyer will each have their own closing costs to be paid as well.

What is Included in Closing Costs?

You don’t want to show up on the day of your closing without knowing all the costs you are responsible for. Fortunately, lenders are required to give you a closing disclosure document at least three days before your scheduled closing.

Making sense of closing disclosures

The closing disclosure is a breakdown of every cost included in your home purchase. Some fees will be going to the county in which the home is located or to the closing attorney (or title company) that is preparing the transaction. The disclosure will also show any services the lender required you to get, such as an appraisal or termite inspection.

You want to go through these disclosures thoroughly and ensure that the lender has not made any mistakes. This is your best chance to get any necessary changes made before the closing date.

You should verify that all personal information is correct and that any arrangements made between you and the seller—or between you and the financial institution doing the lending—are shown on this report. For example, if the seller said they would credit you $1,500 for repairs that need to be made, that should be shown on the third page of the report as a closing cost to the seller.

Keep records

It is highly recommended that you keep track of any expenses you incur during the home-buying process. Keeping records makes it easier to verify that all charges incurred on your closing disclosures are accurate.

You also want to make sure that you aren’t getting charged for something you have already paid for.

Estimating Closing Costs

Most lenders can estimate closing costs for a home, given its price and location. But you can always refer to a closing costs calculator if you want.

Specific costs that go into closing can include origination fees for the loan, application fees, underwriting fees, appraisal and inspection fees, property taxes, and insurance.

How to Pay Your Down Payment

The most common ways of paying a down payment at closing are checks, money orders, or wire transfers. Some people use a HELOC (home equity line of credit) or a 401(k), and even credit cards, though these aren’t recommended.

Unfortunately, not all of us will be able to save enough money to put toward the down payment on a new home. There are some options, though.

Can a down payment be a gift?

Yes, it can! However, there are some issues with monetary gifts that you will want to be aware of, even though they mainly apply to the gifter, not the giftee.

Just getting accused of committing mortgage fraud would be bad, but actually committing it would be worse. You must pay attention to what’s legal and what’s not when it comes to receiving a down payment as a gift.

There are more requirements, but you will need to have a signed letter that confirms your relationship with the person who is gifting you the down payment, stating that it is, in fact, a gift. At no point are you allowed to repay the gift—that would be regarded as a loan and may be considered mortgage fraud.

Another thing to be aware of is moving the money around well ahead of time. This is something that your lender will probably make sure happens, but the banks want to be able to trace the money that is being gifted to you for your down payment. They do this to ensure that it is coming from a legitimate source.

In most circumstances, you can receive a gift for the full amount of your down payment.

Is there a tax benefit to the down payment gift-giver?

No, not really. As a matter of fact, the gift-giver could incur an extra gift tax from the IRS if they were to go over the annual exclusion amount for a gift.

In short, as long as you don’t gift more than $15,000 as an individual, or $30,000 as a joint tax-filing couple, you will not be hit with a gift tax.

How much is the gift tax?

This is where it can get a little convoluted. There is another piece of the puzzle called the lifetime gift tax exemption. This is a number, currently just over $11.5 million, that you can gift up to in your lifetime.

The lifetime exemption doesn’t come into play as long as you stay under the annual gift exemption amount. If you were to exceed the annual allowable gift amount, the overage would be deducted from your lifetime gift total, leaving you with less than you can gift without being taxed on it.

Crowdsourcing as another alternative

With platforms like Kickstarter and Indiegogo becoming so popular, it is no wonder that crowdsourcing has made its way into the home purchasing space. Some popular sites to crowdsource your down payment are HomeFundIt and Feather The Nest.

What is Down Payment Assistance?

Believe it or not, there are programs out there designed to help you put a payment down on a home you would like to purchase. This is called Down Payment Assistance.

Each state has its own separate entities that take care of the down payment assistance programs. Less populated states have fewer programs, while other states that are far more populated have many more programs.

How do I qualify for down payment assistance?

The exact rules for how to qualify depend on the state you live in and the program you’re applying for. Some programs cater to specific groups, such as first responders, nurses, or veterans. Other programs care only about how much money you bring in annually.

To find out if you qualify, you have to do some research into the programs offered by your state.

Do I have to be a first-time homebuyer to qualify for down payment assistance?

You do have to be a first-time homebuyer to qualify for most of the programs. Fortunately, according to the Department of Housing and Urban Development (HUD), being a first-time home buyer just means that you haven’t had any ownership in a primary residence within the last three years.

If you owned a home that you sold five years ago, for example, and have been renting ever since, congratulations! You would be classified as a first-time home buyer and qualify for many down payment assistance programs.

How Much Should Your Down Payment Be?

On average, home buyers are putting down anywhere from 10%-20% on a home. Down payments, however, have multiple factors involved. For instance, if there are a ton of offers made on a home, then a higher down payment might make your offer look more competitive. You also may have to raise your down payment as the price of a home rises.

You should also consider private mortgage insurance (PMI). Lenders require PMI when you don’t have more than 20% equity in a home. If your down payment is less than 20%, you’ll need to pay for this.

How much does my down payment need to be?

The answer to this question, again, is not cut and dried. How much you need to put down on a home depends on the loan product that you are trying to use. VA loans or USDA home loans offer no-money-down options. If you don’t qualify for one of those loans, a down payment on an FHA loan, which the Federal Housing Authority backs, can be as little as 3.5%.

Why and how your credit score factors in

Your credit score will affect the interest rate that you will be approved for, but it might also affect how much you need to put down.

If you are applying for an FHA loan and have a score over 580, you should be able to qualify with only a 3.5% down payment. However, if your score is under 580 and you can qualify for the loan, you will have to put down 10%.

Pros of Making a Bigger Down Payment

Pay less for your house

Interest on your mortgage is simple interest, meaning that your interest is not compounded, or cannot gain interest on itself. Still, by making a larger down payment, you effectively reduce the amount you will ultimately pay for the home.

The following example uses and shows how putting different amounts down can lower your overall payment for your home, assuming a $250,000 loan. In the example below, we use a 30-year fixed-rate loan of 5%.

Down payment interest savings example

Taking out a loan for $250,000 would leave you with a mortgage-only payment of $1,342 per month. Over the life of that loan, if you paid your mortgage on time and put nothing else toward the loan’s principal, you would end up paying $483,139.

We will now run the numbers with a 5%, 10%, and 20% down payment.

Depending on which down payment you make, you would save $24,157, $48,313, or $96,627, respectively. That is almost a 100% return on your investment.

Lower your interest rate

Lenders are more likely to give you a better interest rate when you put down 20% compared to 5%.

Reduce your monthly mortgage payment

It doesn’t take a math whiz to realize that you will be required to pay less each month by lowering the total loan amount and paying less interest. When comparing a 5% and 20% down payment on a $200,000 home, you can easily see that the higher down payment lowers your monthly mortgage significantly.

Higher chance of your offer being accepted

This one may be a little more mythical than numerical, but it still carries weight. When faced with the decision between two offers on their home, where the only difference is the amount of the down payment, a seller is much more likely to choose the offer with the higher down payment. This is because the buyer putting down more looks more credible in the seller’s eyes and is less likely to have problems throughout the loan process.

This is even more true when looking to purchase a home in a competitive market at a competitive price point.

Pros of Making a Smaller Down Payment

Get into a home faster

Saving is difficult. It can be very slow-going and painful.

When you are trying to purchase a home, the last thing you want to do is wait years and years to build up enough in a savings account for a large down payment. By putting less down, you will be able to get into a home more quickly.

Leave more in savings as an emergency fund

All things being equal, by putting less money toward your down payment, you will be able to keep more in your savings account. This means that if anything were to happen to your income stream, you wouldn’t be as at-risk of defaulting on your home loan.

Down Payment Size Considerations

There are a few main questions to ask yourself when deciding your down payment amount.

How much do you have saved?

How much will you have left after making the down payment? The last thing that you would want is to save up all this money, get settled into your home, and then have an emergency happen that you couldn’t afford to pay for because all of your money is tied up in your home.

Putting 20% down is probably not the best choice for you if it will leave you with little to nothing in your savings account afterward. Bite the bullet of taking on mortgage insurance and work toward getting to that 20% equity mark (in which case you’d be let off the hook for the mortgage insurance).

How long are you planning to live in the home?

The longer you plan on staying in the home, the more valuable each dollar of down payment becomes.

If you plan on living in the home for less than 10 years, then making a larger down payment may not be the best choice.

Are you an active investor?

With low mortgage interest rates, your down payment does not gain the greatest return on its money. That said, it is a guaranteed return on your money (whatever interest rate you get) that you can’t get almost anywhere else.

What size monthly mortgage payment can you support?

If you have a lot of money saved up for a down payment, but you don’t have enough each month to support a higher mortgage payment, then putting more of that savings down is a good idea. This is especially true if putting more down is going to save you from mortgage insurance.


As you can see, answering the question as to how much you should put down on a home is not the easiest thing to do. There are many variables that you need to account for to make the best decision for your specific needs. Hopefully, you now know at least a little more about down payments (and closing costs!) and can make a more informed decision.

If this is something that you are struggling with, I would advise that you seek out the opinion of a financial advisor or counselor who can help you navigate the process.


Avoid Paying Unnecessary Fees by Lowering Your Closing Costs—Here’s How

The hardest part’s over because you’ve found the perfect house. Now you have to go through negotiations to buy the house and determine your closing costs.

Closing costs are expenses in the home-buying process that typically equal 2% to 5% of your loan’s value, which can make them very pricy if you’re buying an expensive property.

Borrowers might be able to reduce closing costs with the right negotiation tactics. Wondering how to lower closing costs? Here are several tips to try before you sign off on your purchase.

What are closing costs?

Closing costs are fees that occur when finalizing a real estate transaction on the sale or purchase of a house. Once the property is transferred into your name, these fees are due. Both homebuyers and sellers pay closing costs, but it varies who pays which closing costs and how much they pay.

A home loan amount, a property’s location, and a home buyer’s credit score are some of the factors determining closing costs. Some state laws also require professional services that increase a transaction’s closing costs.

Many closing costs are negotiable among homebuyers, sellers, and mortgage lenders. If you’re buying a property, it’s crucial to research and shop around for home loans before choosing a lender.

Can closing costs be negotiated?

There is some negotiation possible, and the following includes ways to possibly lower your closing costs.

Did you review your loan estimate form?

Before you close on your home, your chosen lender will provide you with a contract covering all the details of the agreement. In it, you’ll find information such as your monthly payment amount and interest rate, as well as the percentage owed for closing costs. Remember that things like a low credit score can contribute to a higher interest rate, so try to have more than the minimum credit score.

In reviewing these numbers, you might find that your closing costs are higher than what you’re willing to pay. Don’t hesitate to shop around at other banks and lenders, which might offer you a better deal, including lower closing costs.

Did you research lender fees?

Double-check the lender fees you have to pay to obtain your loan, as you can sometimes save money here, too. Your lender will charge an origination fee. You probably can’t get out of paying this, but your loan agreement could contain other negotiable fees. There’s no harm in asking your lender about these.

This is an area in which it would help to have other loan possibilities for reference. If your chosen lender tacks on more fees, show them your options and negotiate a lower rate or move on to a new lender.

Do you know what you are paying for?

It’s vital to understand closing costs before you go into negotiations. Of course, you have your responsibilities as the buyer—you must pay the application fee, attorney fees, credit report fees, and more. But you should also know what the seller should cover on their end of the deal.

For example, they should contribute to the closing costs, especially when the market is working in the buyer’s favor. To that end, the seller should also cover the real estate agent commissions.

Can you add the closing costs to your mortgage?

You can lower or avoid paying closing costs upfront by folding them into your mortgage. Some lenders will be open to this option, wherein they pay the closing costs for you upfront and then tack that price into your home loan.

This will save you cash in the short term, but you will end up paying more for your closing costs over time since your loan repayments will come with added interest.

Did you look for financial aid?

First-time homebuyers might be able to get a bit of financial relief when they purchase a property. Many grants can help lower the costs of the home-buying process to encourage more people to get into the real estate market.

For instance, if you choose a Fannie Mae loan to buy one of their foreclosed properties, you might be eligible for closing costs as low as 3%. There are also loan programs for those who have, for example, poor credit history, a low down payment, or veteran status.

Local governments or nonprofit organizations may also provide grants for the home-buying process. These programs mostly favor first-time home buyers, and they help cover your down payment and/or closing costs.

Did you research vendors?

As soon as you get your loan, skip to the part where it describes the vendors who can help you through the closing process. Sometimes the people selected by your bank will charge more than ones you can find yourself.

Do your due diligence to ensure you have the least expensive vendors possible. You can ask your lender for other potential vendors they might not have listed on the loan. This research could save you hundreds of dollars in closing costs.

How to lower closing costs

When figuring out how to lower closing costs, it’s most important to understand where you can save money. Even though each real estate deal is different, there are typical closing costs that homebuyers can expect.

Application fee: Before applying for a mortgage, ask your lender if they charge an application fee. If so, make sure you understand what it covers. Application fees are sometimes negotiable, but you might need leverage in your negotiations. That’s why it’s essential to shop around and know what other lenders charge for an application fee.

Appraisal: In most deals, you’ll need to pay an appraisal company to assess the property’s fair market value. Sometimes though, you won’t have to pay this fee, so be sure to discuss with your lender.

Association dues: If you’re buying a property in a homeowners or condo association, you may have to pay your annual association dues at closing. The buyer and seller can split this cost, and you may owe only a prorated amount of the association’s annual dues if you buy a property partway through the year.

Attorney fees: Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have their own legal representation.

Courier fee: Your lender may use a courier to deliver documents required to close a deal. Doing so can expedite finalizing the transaction, but you may pay for this courier fee as a result.

Credit report fee: Your mortgage lender will run a tri-merge credit report. The reports are your credit scores and history from the three major credit bureaus. Depending on the lender, you may not get charged for this, but you’ll have to ask.

Discount points: These “points” represent money you pay your lender at closing to receive a lower mortgage rate. One discount point equals 1% of your home loan amount in exchange for dropping your interest rate by 25 percent. For example, if you pay your lender $1,000 on a $100,000 mortgage loan, your 4% interest rate drops to 3.75%.

It’s important to have a conversation with your lender about what your options are with these points, especially since points are not required. Using points makes sense on paper but paying more upfront may not work for everyone. For those who don’t plan to live in their home long-term or are likely to refinance, this isn’t the best option.

Escrow deposit and fee: Many lenders require you to have an escrow account for your expected property taxes and homeowner’s insurance premium. Your lender makes your insurance and tax payments for you using the money you deposit into your escrow account.

If you’re required to set up an escrow account, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for doing so. Often, home buyers and sellers agree to split this cost. You can ask about these costs upfront to make sure they fit within your budget.

(Pro tip: It’s always a good tip to confirm with your city or county that your taxes have actually been paid!)

Flood hazard determination fee: The U.S. government requires a flood risk assessment for all real estate transactions. A third party handles the evaluation, and they’ll charge you a fee for their service. You’ll have to pay for flood insurance if they determine your property is in a flood zone. Be sure to keep this possible expense in mind when choosing a property.

Homeowner’s insurance: Homeowner’s insurance is usually not required by law, yet most lenders require it. It is a good idea to have it in case of damage to the property, and you’ll usually pay your first year’s insurance premium at closing.

Mortgage broker fee: You can hire a mortgage broker to help you find mortgage loans. If you do, they’ll charge you a commission based on the percentage of your loan amount. This is usually between 0.5% and 2.75% of the property’s purchase price. To save money, you could look for loans yourself.

Origination fee: Most lenders charge a loan origination fee when processing your home loan application, which is usually 1% of your loan amount. Not all lenders charge an origination fee, however, so, again, it’s essential to research different mortgage lenders.

Private mortgage insurance (PMI): Lenders usually require you to carry private mortgage insurance if your down payment is less than 20% of your home loan amount. The PMI covers you if you miss a mortgage payment. Lenders have varying PMI percentages, but they usually range from 0.5% to 2.3% of your loan amount. There are four ways to pay for your PMI premiums:

  • Upfront: You pay the entire cost of your PMI at closing.
  • Split: You pay part of your PMI costs upfront, and your lender folds the balance into your monthly mortgage payment.
  • Monthly: You pay nothing on your PMI at closing, and your lender adds your entire PMI balance to your monthly mortgage payment.
  • Lender-paid: Your mortgage lender covers your PMI costs in exchange for raising your interest rate; this method can save you money at closing but cost you more over time.

Recording fees: Local governments require a copy of your title before it will recognize you as the property’s legal owner. Your title company usually handles this transaction, and they’ll charge you a fee for that service. However, that’s not always the case, so be sure to ask.

Title search fee: Before you can purchase a property, someone must verify its ownership. A title company handles this process, ensuring no one else can claim the property after you purchase it. The company charges a fee for this service, and it often comes hand-in-hand with title insurance, which protects the buyer from future claims against the property. This fee varies by location and property; it ranges from $200 to $1,000. You can save money by searching for a title company within your budget.

Overall, to save money, you should compare lenders and their fees to make sure you’re getting the best possible deal. You’ll see these fees on a document called a closing disclosure. These are the different costs to consider when buying a home.


How Long Does It Really Take to Buy a House?

It is super important for any real estate investor to be familiar with the process of closing the sale of a property. Whether you are buying a single-family home or multifamily property, you need to understand and navigate the process of closing on that property.

Just like in sports, you always want to be on the offense during this process instead of the defense. You need to understand what to expect so you can set yourself up for success and actually get to closing. You’ll also want to know what’s reasonable in terms of a timeline.

How long does it take to buy a house?

So you’re ready to buy a house, but you aren’t sure how long this whole process is going to take. While each deal is different and can vary in a multitude of ways, for the most part, buying a house is pretty straightforward.

Assuming that you are going to be taking out a loan for the purchase of your new home, you will have to follow most, if not all, of the steps below.

If you are going to be paying cash for your home, however, it will be up to you whether to follow many of the steps.

What are the stages of buying a house?

Saving for a down payment

This will be entirely dependent on your personal financial situation. I won’t be including this as part of the end analysis on how long it takes to buy a house, but it is a very important (if not obvious) step in buying a home.

For some special types of loans, you don’t have to put any money down, and this step will take no time at all.

Most of the time, though, you should save 5%–20% of the purchase price as a down payment.

As an example, for a home that you are going to purchase for $200,000, you would need anywhere from $10,000 to $40,000 saved as a down payment.

Before you submit an offer, put all of the money that you have saved into a savings or checking account that you aren’t going to be touching until you close on a home. This will come into play later (see below, under Get Your Closing Funds Ready).

Find an agent you like (1–10 days)

This is one of the most important steps when looking for a home. You’re going to be in contact with your agent through the entire home-buying process. You are going to spend hours looking at houses together and will look to this person for advice when it comes time to put in offers and negotiate.

You must take the time to search for a qualified agent during this period. Choose one who has experience buying houses in the area you’re looking at and knows the ins and outs of the market.

You also want to find one who comes recommended by others who have bought houses with them. These don’t have to be people that you actually know, but that is helpful.

On top of that, you want to find someone who matches your personality and the goals that you have for purchasing a home. For example, if you are a very laid-back person, it might not be in your best interest to go with someone who is always at an energy level of 30 out of 10.

Get pre-approved for a loan (1–3 days)

This process is very simple and can usually be completed within 24 hours.

Whatever lender you choose is going to ask you some pretty simple qualifying questions about your financial situation. They’ll want to know how much you make, either as an individual or a household, per month. They are also going to want to know what recurring debts you have.

Debts can be other homes that you own, car payments, and even credit card bills that you owe. These aren’t the only types of debts, just the most common ones.

After a short phone call, the bank will run a credit check on you to make sure that you are a qualified individual. Don’t worry too much about this part, even if you don’t have the best credit score; as long as your income minus your debt is above the bank’s threshold, you should be able to get a loan.


Individual investors looking for a steady income stream often turn to real estate and face the same age-old question: Is it better to be an active or passive real estate investor?

Because real estate investments provide passive income — steady cash flow from rents — plus some very generous tax benefits they are a popular investment vehicle. There's also a worthy prize at the end too; the potential to realize substantial capital appreciation and double or even triple your investment! The combination produces higher risk-adjusted returns rather than traditional passive income sources such as dividend-paying stocks, bonds or annuities.

When private investors decide whether to pursue real estate investing on either an active or passive basis, they need to consider the pros and cons of each strategy. In order to determine which investment strategy is best for you, let’s first understand the main differences between the two.

Active investing is when an investor personally purchases a property for rental cash-flow or to fix and sell for a profit. The property could be anything from a single-family home to a large multifamily property. Active investors are involved in every aspect of the deal from finding it, obtaining financing, personally guaranteeing the loan and subsequently managing the investment. The process of identifying the correct market, property, financing and closing the deal can be arduous, but it can also be very rewarding. If it all goes well, an active investor reaps the lion’s share of the returns.

Passive investing is a hands-off approach which allows an investor to place one’s capital into a real estate syndication — more specifically, an apartment, self-storage or mobile home park syndication — that is managed in its entirety by a sponsor. Investing passively in private real estate means investors outsource the selection and management of investment properties to a sponsor. These sponsors pool funds from many investors to buy larger or an entire portfolio of properties, then execute specific business plans, run day-to-day operations and report back to investors.

Based on my personal experiences of being both an active and passive real estate investor and working with hundreds of other investors through my syndication business I've seen 5 important factors to consider when deciding which investing strategy is best for you. They are: control, time commitment, diversification, deal flow and risk.

#1 Control

I consider an opportunity to be active or passive depending on the level of control you have. As a passive investor, you are a limited partner in the deal. You give your capital to an experienced sponsor/syndicator who will use that money to acquire and manage the entire commercial real estate project. When you give up control you're putting a lot of trust into the sponsor and their team to execute on the business plan.

When vetting a sponsor make sure proper due diligence is done so there's an alignment of interests. For example, the sponsor will offer you a preferred return, which means you will receive an agreed-upon return before the syndicator receives a dime. Therefore, the syndicator is financially incentivized to achieve a return above and beyond the preferred return.

As an active investor, you can directly control the business plan. You decide which investment strategy to pursue. You decide the type and level of renovations to perform. You decide the quality of tenant to accept and the rental rate to charge. You determine when to refinance or sell. With passive investing, all of the above is determined by the syndicator.

Normally from a personality fit someone is either active or passive, but not both, and it usually comes down to whether they want to have control or not.

#2 Time Commitment

Many real estate investments require improvements, and all require oversight to maintain the property, collect rents and handle issues that arise.

As an active investor, the advantage of more control comes with the disadvantage of a greater time commitment. Active investors become landlords, which is grueling and time-consuming work — especially if renovations or construction is part of the business plan over and above maintenance or rent collection. It is your responsibility to educate yourself on the particular asset class you'd like to invest in. Then, you have to find and vet various team members (broker, property manager, attorney, accountant, etc). Once you have a team in place, you have to perform all the duties required to find, qualify and close on a deal.

After closing, even though you may have a good property management company, your investment is not completely hands-off. When something unexpected occurs, you’re responsible for making decisions and fixing the problem, which can come with a lot of stress and headaches. For example, if a toilet breaks someone is going to call you to approve the spend, ask which toilet to buy and from where, etc.

Of course, it is indeed possible to automate the majority, if not all, of the above tasks. But that requires a certain level of expertise and a large time investment to implement effectively.

Passive investing is more or less hassle-free. You don’t have to worry about any of the actions described above. Once you've vetted the syndicator/operator and the deal, you simply invest your capital and are kept in the loop with monthly or quarterly project updates all the way up until there's an exit/sale.

#3 Diversification

It's much harder to become more diversified when you're an active investor because so much time is spent becoming an expert in your particular market and/or asset class. Most active investors stay close to home because it offers them easy access and that’s where they’re most familiar with the local market. But what’s the likelihood that the best deals in the country are within a mile or two of where you live?

As a passive investor, you trade control for diversification. When you invest in a real estate syndication, you're a small piece of a bigger deal and it's much easier to diversify your investments over many deals when you're investing a smaller amount. If you're an active investor purchasing a single family home by yourself you're typically putting a larger portion of your capital into that one particular deal.

I'm very comfortable handing over full-time day to day control to an experienced operator. In exchange for that I’m able to spread my capital across more investments in more markets, which allows for much better diversification. Three things I focus when diversifying across many investments are: real estate asset classes, geography and operators/sponsors.

  • Real Estate Asset Classes

Many investors consider investing in real estate syndications in order to get better diversification within real estate asset classes. (multifamily, self-storage, office, retail, industrial and manufactured home parks, etc) Typically each sponsor has a specialty in a specific type of asset class that they have a competitive advantage in. One should be cognizant of diversification in your real estate portfolio, so spreading investments amongst many asset classes like apartments, self-storage and manufactured home parks is a great way to achieve this. In fact, these three asset classes are considered "all weather" assets because they tend to hold up well during all market cycles.

  • Geography

Another form of diversification within real estate syndication is geography. Actively investing out of state can work, but passive investing through syndication deals is ideal for out of state investors looking for better value in top markets. Some of the best deals are out of state in growing markets. It can be very difficult trying to be an active out of state investor due to competition, relationships, market knowledge, etc but if you align yourself with a reputable, successful operator in that local market you can gain access to some great deals you otherwise wouldn't have had access to.

  • Sponsor/Operator

Vet sponsors carefully and don’t feel you need to stay married to one sponsor forever. Ensure they are growing their depth with key management for continuity and that they are staying true to their philosophy and model which should be conservative and tested. When you invest with multiple sponsors you'll get to see many deals and gain a much better perspective on the overall market.

#4 Deal Flow

Locating the right property and determining the right price takes real estate acumen, local knowledge and financing. Active investors should consider taking a “boots on the ground” approach and be ambitious and disciplined in their pursuit of information about the market or markets where they invest. Successful investing starts with having high-quality deal flow and deals don’t just fall into one’s lap. Investors must constantly look at properties and their various features so they’ll know a good deal when they see one. It can take years to get a sense of a market and what kind of properties perform well.

Passive investors outsource the acquisition process to syndicators who uncover quality deals. Most syndicators partner with experienced operators who employ a team of deal sourcing professionals looking at hundreds of deals a year across many markets. By owning a share in many properties, passive investors’ fortunes don’t rise and fall with those of any single asset, and they don’t need to answer the phone in the middle of the night when the toilet gets backed up in a tenant’s apartment.

#5 Risk


You are exposed to much less risk as a passive investor. You're plugging into an already created and proven investment system run by an experienced sponsor who (preferably) has successfully completed countless deals in the past. Additionally, there is more certainty on the returns. You will know the projected limited partner returns — both ongoing and at sale — prior to investing. And assuming the syndicator conservatively underwrote the deal, these projected returns should be exceeded.

Active investing is a much riskier strategy. Buying properties directly can also open an investor to unlimited risk exposure through loan guarantees, which increases your exposure to risk. However, with the higher risk comes a higher upside potential. You own 100% of the deal, which means you get 100% of the profits. But, you also have to bear the burden of 100% of the losses.


In the end there are many ways to become a successful real estate investor. Not all strategies are the same, so it's important to understand the pro's and con's and to identify which path (active or passive) is best for you.

For those that have a lot of time, access to deal flow, and can build out a solid team, active investing might be the best route. If you're a busy working professional or business owner with limited time, partnering with a syndicator and passively investing in deals is a great way to diversify your investment portfolio and generate passive income with very minimal effort. I have found the returns will be comparable than if you do all the work yourself, but the risk profile is considerably lower. It is for that reason that I'm a huge advocate of the Passive Investing Strategy.


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