Compare Syndication Vs. buy and hold

[Hernan Guelman]

When I look at 2 main strategies: investing in a syndication deal, that has 16-20% IRR, I get to normalize that into meaning ~16% yearly growth of my money, meaning doubling the money in around 5 years. 20K in -> 40K out.

When I compare that to buy and rent deals, there are CoC and Cap rate numbers but I struggle to compare that to the simple syndication deals. Anyone can give me a good and simple formula or strategy to how you compare one strategy to the other?

[Brian Burke]

Syndications and direct ownership are very different from one another for a lot of reasons, but in the context of comparing them on a strictly financial basis there are enough similarities to draw some comparisons. 

But first, you would have to frame the two options with a similar strategy.  For example, if you are studying a syndicated Multifamily deal where the plan is to rehab a property, stabilize it, then resell it in five years, you would have to model your direct ownership option the same way. 

So let's say that your direct ownership option is to purchase a single-family rental.  First, you would calculate the net income you expect to receive from the rental each year. Next, calculate the expected sales price in year five (this requires a high degree of speculation and guesswork on your part) and add the cash received from the sale to your fifth year cash flow.

Finally, determine how much you need to put down. Then, on a spreadsheet put your investment in one column as a negative number, and each year's cash flow in adjacent columns as positive numbers (assuming that the cash flow is positive). You can then use Excel's IRR function to calculate the IRR. You can also calculate the COC return for each year. And, you can calculate the dollars out to total dollars in to determine the equity multiple. Now you can compare the IRR, equity multiple, and COC to those in the syndicated offering.

Now you know how to compare, but you also have to consider how valuable the result of all of this math really is.  There are multiple failure points in this exercise. 

First, what if your speculative exit price of your rental is incorrect?  Now your numbers are off.  

Or, what if the investment sponsor of the syndicated overestimated the income, underestimated expenses, or incorrectly speculated on rent growth?  Now their numbers are incorrect.

In either event, the value of your mathematical comparison is compromised. Instead, a better measure for which to compare boils down to whether you'd rather be directly involved in real estate investing or would rather invest passively.  On the other hand, it doesn't have to be an either/or scenario.  Many direct investors in real estate also invest in syndicated offerings to provide their overall strategy with the diversification of property types, markets, or scale that they can't or don't get from their direct investing.