Pros and Cons of Apartment Syndication vs. BRRRR with SFH's?

Question

My wife and I are still reading and learning as much as we can before diving into our first REI experiment -- our situation is that I have some RSUs from my job coming in over the next few years that we'd like to re-invest toward an early retirement scenario. I have been reading David Greene's BRRRR book and Long Distance REI, as well as Michael Blank's Financial Freedom book about apartment syndication and still trying to decide which route to pursue. Maybe small multi-family could work as a hybrid scenario.

Some of the parameters we're working with are as follows:

- We live in the Seattle area, so properties are expensive here, and don't tend to cash-flow -- that's why we're looking to invest out of state.
- I work full time and my wife runs her own business -- we have a strong business / entrepreneurial background, and we have some spare bandwidth after-hours, but not enough to take on another full time job (unless it can very quickly replace about $12K per month in expenses)
- We're not too keen on sharing walls with others (we like our privacy) and we hate moving, so house hacking is low on our list of options, but we're open to it as a last resort
- We won't have enough capital to buy an apartment building all-cash, but we could afford a down payment, or we could afford to buy a small multi-family in some geographies.

Can anyone offer pros and cons of out-of-state apartment syndication vs. out-of-state BRRRR? One of the things I'm especially concerned about is the time commitment factor, since that's the one asset I can't leverage beyond a certain limit :-)

How many hours a week of work are we signing up for in each scenario, and how do we limit our risk of over-extending ourselves / losing our capital?

In either case, should we pursue a creative partnership with someone who can put in more of the sweat equity?

Or should we be more "realistic" and start looking at more passive investment options?

Thanks,-Jesse

Michael Bishop · Answer

@Jesse Watson no investment is truly passive, but beyond upfront vetting of Sponsors and vetting of deals as they come out, syndication is about as passive as it gets. Based of your brief description of your scenario and preferences, I would say that BRRR, especially out of state, is not the right play for you as it will certainly be one of the more time intensive options.

Syndication by it's nature is a partnership with someone who has sweat equity. If you find the right Sponsor, they won't make any money unless the deal makes money for you.

Lane Kawaoka · Answer

Its not really a pro con argument.

For high net worth investors (at least $500k net worth) going to buy hold and syndications is the way to go.

BRRR is higher risk and return and also a lot of sweat equity.

Jesse Watson · Answer

Thanks to all who replied on this thread with the awesome feedback! Definitely helps give us clear avenues to research as we hone in on making a decision.

Scott Mac · Answer

@Jesse Watson

Hi Jesse,

I don't know your personality, time constraints, and other commitments, but an option that doesn't seem to be on the table right now is partnering with 2 or 3 other more experienced guys (now I'd say ladies too, but I don't know how your wife would feel about that--and that's VERY important).

Actively partnering, as in being an active LLC member (vs. passive) with another (or possibly 2) active member(s) who all put CASH into the deal (not Fix up Fred who does all of the work on it and Johnny Cash who covers the money end--but ALL Cash members who all do something on the investment and also put significant CASH into the LLC).

This will amplify your working capital and may let you take down (as @Kim Lisa Taylor said above) a local deal where you're not in danger of being upside down on it.

It's best to have an experienced Real Estate attorney draw up the LLC for a partnership (after all of you consult with your tax CPA about it FIRST). What I'm saying is, in a partnership Legal Zoom (and the like) is not your best friend. Also depending on your situation an LP, or an S-Corp or a Corp might be advised instead of an LLC by your CPA and Attorney.

Don't just choose an LLC because I used it in this example, ALWAYS consult with your Tax CPA and your Attorney before forming any entity and follow their advice.Also, lot of people network for partners and learning at Local Real Estate Meetups, and similar real estate gatherings, and it's best to really get to know someone before partnering with them.

Good Luck!

Kim Lisa Taylor · Answer

@Jesse Watson, the advice I give to all of my clients is don’t buy small multi-family properties out of state. But do buy all that you can within 2 hours of home.

I say this based on my own syndication experience as well as that of my clients. Here’s why: unless you have at least 80 units, you can’t afford to hire your own full-time property manager and maintenance person. So let’s say you have 20 units. This means you have to find a property manager/maintenance team that will devote 25% of their time to your property. Unfortunately, they won’t see it that way; they’ll treat yours like just another single property. Or they won’t have enough other work and they’ll start charging you more to compensate.

In our case, this meant they didn’t aggressively market or show vacancies so the vacancies always crept up. Over 9 years of ownership of a 27 unit property, we had 4 different property managers and we typically had to replace them every 2 years. They started out strong, but then vacancies crept up, turns slowed down and they started charging too much for repairs.

If you put your funds, family and friends together to syndicate larger properties, you can make your dollars go much farther; hire professional property managers who devote full-time staff to your projects, and create the long-term income streams you seek to replace your current income.

Alina Trigub · Answer

@Jesse Watson

As @Michael Bishop already stated, syndications should become much less involved for you down the road once you identify all the sponsors you'd like to invest with. However, it is essential to be able to give up the control of decision-making.

BRRR will be a very involved business and based on what you said above, it doesn't sound like you and your wife want to enter into running additional business. So decide on your bandwidth and commitment to execute and long term plans of course to ensure you're taking the right path for your personal situation. Here're a few articles to help guiding you further: https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndicationhttps://www.biggerpockets.com/member-blogs/10850/85836-should-i-buy-a-turn-key-property-or-invest-in-a-syndication

Reach out if you need further guidance.

Luke Miller · Answer

@Jesse Watson two very different scenarios. One gives you a lot of control, one doesn't. How important is active control over your investments? If the answer is "very". Go with BRRRR. If it's the opposite, and you have the net worth requirements, go syndications.

Evan Polaski · Answer

@Jesse Watson, I will add to what @Michael Bishop stated.  Nothing is truly passive.  For syndications, you need to vet sponsors, and there are a lot, to find one who you believe in and their investment profile makes sense for you.  You also give up control.  I.e. you do not get a say on when you exit the property, the level of renovations being done, etc.  For many people, they don't want that level of control, but if you do, it is probably not the right investment.

As for BRRR, anything that involved rehab will need to be a hands on endeavor.  You could seek partnership with a local investor, and align interests through your structure.  But again, you will have some vetting to do.  As someone who was "BRRRing" before it was a thing, and fix and flip houses, I can tell you this is DEFINITELY not passive to do on your own.  There is another active thread here about a contractor that put the wrong tile up in a bathroom, and having to deal with that.

From the sounds of it, the syndication route seems to be the better play. Since you aren't hands on, evening hours to review offerings and setup calls with sponsors seems to fit.  The nice thing too is some, if not most, can be long term holds through 1031 exchanges into the next deal.  So even if the sponsor's track record is 2-5 year holds, if they are an active investor, there will be more coming down the pike to take your investment and proceeds and roll it into the next without taking the tax hit in between.  And you still get the benefit of direct ownership through depreciation and consistent cash flow.

Taylor L. · Answer

The biggest pro of syndication investing is that you don't have to lift a finger if you're passive. An out of state BRRRR business is going to require a lot of your time to operate. Like way a lot.

It's also not either/or. Syndication investing is so passive you could also do BRRRRs.

Pros and Cons of Apartment Syndication vs. BRRRR with SFH's?

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