Your first $50k: SFR rental or LP in a syndication?

[Jon Schwartz]

Hi everybody,

Newbie here!

My wife and I are in our mid-30s and have careers we love, so I see REI as a way to diversify our investment portfolio and create passive income. I envision myself buying a turnkey SFR rental or two, then getting involved with syndication as an LP, and then perhaps pursuing deals as a GP further down the road. (My line of work is somewhat ageist, and it's likely that my career will begin to wind down 10 or 20 years before I'd otherwise choose to retire. Many of colleagues go into teaching at this point; I'm laying the groundwork for a late-in-life career in REI.)

Lately I've been wondering: should I skip the SFR rental part of the plan?

On the one hand, I want the nuts-and-bolts experience of buying and owning my own rental: researching markets, underwriting deals, dealing with the cap ex and headaches, etc. I'd hire property management, so my involvement would be thereby limited, and my cashflow would be reduced. I'm most interested in the experience (provided I don't lose my shirt and there's the promise of long-term capital gains). My family is financially stable and in no rush, so why not add this notch to my tool belt

On the other hand, why put up with the hassle of a SFR rental when I feel syndication is the better long-term strategy? I could devote these next few months to networking with GPs, reviewing deals, getting experience with due diligence, etc., in the syndication world -- and then dive right into the niche that I see as the better long-term strategy. We're accredited, so we don't have that obstacle to deal with.

To SFR or not to SFR, that is the question. Any opinions would be appreciated. Thanks so much!

[Luke Miller]

Okay, i'll bite. You are wrong and you're giving advice on things that you've clearly never researched, which is dangerous. I have researched both. Extensively.

 Obviously i'm biased because I do invest in syndications, but that has no bearing on the truth... 

When you invest in a REIT, you buy shares of the company and it pays you dividends from its rental income.

REITs are subject to SEC regulations just like real estate syndications. They have regulations on minimum numbers of investors, ownership share limits, governing regulations, and a few more stipulations.

They can buy publicly traded or private entities. If you have a 401(k) from your employer, there's a good chance you can invest your account into a REIT.

How is this different from an apartment syndication?

Primarily, REITs distribute income as dividends, not as rental income. REIT investors can write off depreciation, but since a REIT is not a pass through entity, you cannot apply paper losses to your other ordinary income. For most HNW individuals this is a deal-killer.

You also cannot 1031 exchange REIT proceeds. Since you own a share of a company, not a share of a property, you can't 1031 exchange your REIT investment returns.

REITs can be a little easier to invest in, but difficult to divest in. I know someone that has tried and it's difficult. There is no minimum amount required to invest in a REIT. You could go invest $100 into a REIT if you wanted to.

They are also more liquid, since they are dividend paying shares, instead of real property. You can get your money out whenever you need (assuming you can sell), unlike a syndication where you usually have to commit your money for about 5  to 10 years.

REITs are diversified over several properties whereas an apartment syndication owns only one property. 

The National Association of REITs has recorded and published a large selection of REIT returns over time. The average annual growth rate of their sample of REITs has been 9.72% over the past 40 years. Absolutely lousy when compared to value-add multifamily syndications.

Lower risk of REITs = lower returns. Slightly higher risk of syndications = stellar returns. As with all investing, the more you can do to mitigate risk the better. Research sponsor, research market, read the ppm, ask for track record on past performance. NONE of these things can be easily done with a REIT.

If you are looking for higher returns and are interested in tax advantages, a syndication could be for you. If you want low risk, don't have the money to invest in a syndication and want slightly better returns than the stock market, go REIT.

Clearly REITs and Syndications aren't the same thing, @Aaron K.

If you feel the need to comment on REITs and syndications again, feel free to copy and paste the above.