Should I Invest in a Real Estate Syndication or a Rental Property?
I get this question a lot - should I invest in a real estate syndication or a rental house? My answer, it depends. It depends on your investing desires and goals.
Ask yourself a couple key questions….
1. Do you want to be an active or passive investor?
In short, an active real estate investor is one who is actively involved in the finding, qualifying, acquiring, landlording, and managing of deals.
A passive real estate investor doesn’t do any of the work the active investor does, but yet still gets the same benefits such as; monthly cash flow, appreciation, depreciation and all the other tax benefits.
2. Do you want short term gains, or long term holds?
Investors who want short term gains can invest in things like fix and flips, where the investor purchases a distressed property, renovates it, and sells it for profit.
Long term holds, like real estate syndications, are great for those who want monthly/quarterly cash flow income over a longer period of time. Also, a great option for those investing with their self directed IRAs, who want their money to grow until they hit the age requirements to pull their money out without penalties.
Do you prefer to control decisions with the property? Is it important to you to have a say in repairs, tenants, and daily operations?
Are you busy with a career, a family and have no interest in managing the day to day of rental properties? Apartment syndications are a great fit if you want the benefits of real estate investing without all the work and effort of managing the day to day.
Most real estate syndications require a minimum of $50,000 investment, however, you may be able to purchase a rental property, in some markets, for less than that for a down payment. But remember, you can also invest in real estate with your self directed IRA.
I do have a portfolio of rental houses that I hire property managers to run, and therefore, these properties could be considered passive investments. However, I was very active in finding the properties, acquiring them with personal financing, and managing the property managers. In evaluating returns and comparing my rental house portfolio with the returns from my investments in apartment syndications, the apartment syndications net is more stable and consistent returns over time, with far less effort and work.
The below case studies compares 4 of my personal real estate investments (one of my single family homes, one of my duplex rentals, and two of my apartment syndication investments).
Property 2 has gone smoothly, with no major expenses and turnovers in the past year, however, it still garners less income then my apartment syndication investments. The amount isn’t huge, however, there is a chance that this property will incur expenses with at least a turnover and some maintenance in the next 12 months, which will give it less points for piece of mind. The $333 monthly cash flow from the 8% preferred return in the apartment syndication investment comes without impact to unit turnover and daily repairs.
Property 1 is less of an initial investment, but has been a doozy in expenses and repairs. In the past 12 months, the heavy rain and storms in the mid west have caused tree branches to go through windows and a twice flooded basement. The harsh weather has resulted in property damage and the need for an expensive sump pump. It’s been a rough year for this property and it barely broke even.
The income from my 10 residential rental units fall somewhere between property 1 and property 2, in any given year, and can not be predicted. I maintain a 10% reserve for maintenance, repairs and vacancies to ensure I can cover expenses. But, hands down, if I had known about passive investing in apartment syndications 10 years ago, I would have started there where the monthly cash flows more certain and predictable.
In summary, if I were to put my investment dollars into a real estate syndication, with an 8% preferred return, I could be fairly confident that I’d be getting $333 per month, as long as the business plan is executed correctly. But, my residential rental properties all vary in performance, sometimes doing better, and sometimes doing worse. It’s those months with large expenses, or no rents from turnovers, that wipe out all my cash flow. I still love investing in real estate and still invest in BOTH.
Even though I still like having my residential rental units and continue with them as part of my portfolio, I do love the no fuss, no worry part of real estate syndications. This is why I feel passionate about shouting it from the rooftops - so that everyone can know their options when they want to start their real estate journey.