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Some of the people misinterpret the meaning of passive investment

Deividas Urbanovičius
Some of the people misinterpret the meaning of passive investment
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This article was posted on delfi.lt

In theory, passive investing is defined as long-term, lower-risk investments with the aim of gradually increasing capital holdings. In most cases, this investment model does not require involvement and extensive knowledge of financial markets, as it invests in financial instruments that reflect market averages. 
In society, passive investing is most often seen as "I invested and am waiting for a return, or I bought a property and receive rental income every month". However, this approach to passive investing is very superficial, according to Deividas Urbanovičius, Head of Investor Relations and financial markets expert at crowdfunding platform InRento, because in all cases, the investor needs to look into and understand the process of how the investment works, otherwise the consequences could be dire. 

How is passive investing perceived by most of the public?

Many people see passive investing as a process of putting money somewhere and doing nothing to get the best return, but this is irresponsible to say the least. There are more than 1 million second and third pillar pension contracts in Lithuania, but only a small percentage of them could tell you exactly where their money is invested, what the return was last year and what the value of the investment assets they currently have. 

Passive investing is not a case of entrusting everything to "someone", and this approach can have negative consequences, such as panic, emotional imbalances, etc. when the economy fluctuates and one does not understand one's own investments. 

In Lithuania, a significant proportion of people invest in real estate – buying and then renting. This type of investment is often seen by many as a source of passive income, but this is not entirely true. By some definition, passive income is generated when a fixed return – interest, dividends, etc. – is received on a monthly, quarterly or annual basis without any additional action or effort.

When it comes to investing in real estate, extra effort is certainly required – finding tenants, maintaining and maintaining the quality of the premises, property taxes, property declarations and insurances, and other similar processes requiring administrative costs," says Urbanovičius.

In summary, investing in rental property is not a passive investment, it is an active one, which requires a lot of commitment and time, and in the event of a bad tenant, it can be fraught with the risk of insolvency or damage to property.

The golden mean

There is no single truth about which investment strategy is better, active or passive. It all depends on the investor's experience, risk tolerance and the time period over which they want to accumulate capital. 

For those who want to start investing or who want to broaden their investment spectrum, as an intermediate option D. Urbanovičius recommends investing in crowdfunding real estate rental projects.

"Investing in real estate rental projects through InRento has a slightly different model and cannot be called only active or only passive. There are three parties involved in this crowdfunding platform – the investors who pool the money, the project owner who manages the property project and the platform itself, which makes sure that everything runs smoothly. 

After analysing the project, carrying out a risk assessment and other necessary procedures, InRento enables the investor community to lend their money to the project owner who intends to buy the property for rent. The acquired property is pledged on behalf of the investors, who receive a fixed interest rate each month and a capital gain payable at the end of the project. 

Investing in this way means that investors do not have to worry about property insurance, mortgages, tenants, renovation of the premises and so on. This means that by using the InRento platform, investors turn active investment in real estate projects into a kind of passive one", explains the financial expert.

However, he stresses that this investment model should again not be understood as an "I invested and I left" model, because even though many of the responsibilities fall on the investor's shoulders, the investor still has to be involved in the process of understanding the investment. 

"InRento makes passive investing what it should be – observable and understandable. Unlike investing in, for example, second pillar pension funds, where the investor cannot withdraw his money until retirement age, there is much more flexibility when investing in rental property projects. 

For example, investors can sell existing investments on the secondary market to recoup the money they have invested, reduce or increase the size of the portfolio as needed, reinvest the investment returns or the profits earned. In other words, the investments are managed, but not the assets themselves", explains Urbanovičius.

According to him, actively investing in short-term rentals, searching for tenants, trying to get the best price through various apps (Airbnb, Booking) can generate a higher return than investing in rental projects found on the InRento platform, but at the same time, it also entails a potentially higher risk.

"If you are buying a rental property for the first time or for a relatively short period of time, it is likely that you have not encountered some challenges, you do not know how to deal with one or another situation in practice or even legally. At the same time, when investing through InRento, many things are taken care of by an experienced team, and in case of complicated situations, solutions are found faster and more efficiently", says the financial expert.

Since its launch in 2020, InRento has financed more than EUR 14 million in investments and, according to official statistics from the Bank of Lithuania, is one of the few crowdfunding platform operators with no delayed or recoverable projects. InRento was recognised as the best investment technology at the European FinTech Awards 2022 in London.