Which Makes You More Money, Investing in Real Estate Syndications or Rental Properties?
When it comes to real estate investing one of the questions that I’m frequently asked is, which of these investment opportunities provides a better return? Individuals want to know if investing in single-family properties provides higher returns or if real estate syndications are the best way to increase your net worth.
The main benefit of investing in real estate syndications, particularly multifamily properties is that it provides potential investors a true hands-off passive investment, which shields passive investors from the day-to-day management that is required to run these properties well.
The sponsor team, deal sponsor, or general partners a.k.a lead syndicator is the active investor. They are a team of highly skilled professionals with a proven track record who takes care of everything including executing the stringent business plan to improve efficiencies on behalf of the investor – you. There is no active work involved for the individual investor when they invest passively in an apartment complex. Just that alone can make a multifamily syndication a much better deal for a lot of people. I mean who wouldn’t want to receive passive income, great tax benefits and avoid all of that work and stress? Amiright?
On the other hand, investing in single-family homes, you have to do all the real work. That includes working with real estate brokers, understanding market conditions, coming up with a down payment, funding the property, rehabbing the property, understanding how to analyze the value of the property, putting in countless offers, and finding that one good deal. With this real estate strategy you should ask yourself: “How much time do I have?” and “How much money do I have to devote to this?” You have to understand your risk tolerance when investing in single family homes or small multi-unit properties because it will take both time and money to do it well.
In exchange for all that hard work, you’d expect better returns, right? Well, maybe not so much…let’s take a look at some real-life examples of the two investment strategies and their returns.
Real Estate Syndication Investing in Multifamily Properties
If you were to put a $50,000 investment into an apartment complex through a commercial real estate syndication with an 8% preferred return, then that would be $333 per month in cash flow, which you would receive on a quarterly basis in most cases.
$50,000 x 8%= $4,000 / 12 months = $333
If you are able to get a passive income return of $333 per month with a 50K investment in a real estate syndication, then a real estate project that is an active investment – meaning you have to put in the work and the time – should net you more than $333 a month if you’re investing the same amount of capital. The reason is that there is a cost to your time, work, and effort that should be factored in, so the returns should be higher to make it worth your while.
Rental Real Estate Properties
Now, let’s take another real-life example.
Let’s look at a 4-plex with a purchase price of $240K with each unit renting for between $600 – $700 a month. The down payment was $50K and the monthly PITI (principal, interest, taxes, and insurance) was $1,731 a month.
The whole point of investing in rental units is that you will have cash flow at the end of each month and that the rental income will exceed the expenses.
This was a month when one of the tenants of the four units didn’t pay. So there were three tenants that did pay for a total of $2,035 before expenses for that month. But we had expenses – property management fees, and some maintenance issues totaling $660.
$2,035 (income) – $660 (misc. expenses) = $1,375 net profit (before debt service)
$1,375 revenue doesn’t sound bad, right? Well, we don’t own the property outright in this example, remember we have mortgage payments and the related costs of $1731 a month. So, with revenue of $1375 and costs of $1731, that means there was actually a $356 LOSS for the month.
You really can’t count on a specified amount of income each month with this type of investment property because you never know what your vacancy rate will be nor will you know what your expenses will be as there are always surprises.
Commercial real estate syndications have unexpected expenses and certainly vacancies as well, but the economies of scale with a large apartment building offset the vacancies and expenses better than smaller real estate properties such as this 4-plex example and certainly single-family homes.
So, let’s take a look at some other months.
This was the same situation as the previous month – only three of the four tenants paid their rent. In this particular month, there were more expenses – again property manager fees and some repairs. The total revenue before having to pay the debt service to the bank was $1270 but the PITI was $1731 leaving another LOSS – this time in the amount of $461 for the month!
In March, all of the tenants paid which grossed $2,590 in revenue. Yipee! And although there were some expenses, the net operating income for March was $1,966.
So, with a PITI of $1731 and net operating income of $1,966 there was finally a profit of $235. Still hadn’t made up for the losses yet, bet it was a start. (thank goodness!)
Again, all tenants paid. This month had minor expenses as well. The income after all expenses was $2,688 minus the PITI of $1731 generating a net profit of $586 in cash flow for that month, which was awesome! But just keep in mind this was only one month that showed this much profit during this four-month span and there were sizable losses in two of the previous months.
Rental Property Review
The investment of $50,000 on this particular 4-plex generated just $4 of net income – cash flow for the total of those four months. Yes, that’s right, just $4.00. There were two months of positive net profit but also two months of sizable net loss.
The important thing to remember with smaller individual rental properties is that they take a good deal of work and quite a bit of time. They are not an investment vehicle for someone who wants truly passive income and wants to be completely hands-off.
If you want to be hands-on with your investments and you have a solid understanding of the real estate market that you’re investing in, then this may be a good option for you, but you will want to make sure that you have the kind of time that this type of investment demands to be successful.
So, Which is Better For Your Real Estate Portfolio?
There’s no right answer for everyone’s investment portfolio. There are considerations such as the level of risk tolerance, amount of capital, and most importantly the amount of time one will have (or want to have) to devote to the real estate investment. There is value in both investment strategies.
Smaller real estate rentals can potentially have higher returns IF your property remains fully occupied with good, paying tenants, your repair and maintenance costs stay low and you have the time to devote to this strategy. There are low maintenance properties but no such thing as no maintenance properties.
For a no-fuss investment with consistent cash flow distributions, then it may be a good idea for you to learn more about how real estate syndications can be a great investment strategy for both your shorter-term goals and your long-term goals.
Note: we are not financial advisors and are not offering financial advice of any kind. Please consult with your advisors before making any investment or financial decisions.
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