Why buy SFRs or small Multis if Syndications have more upside?

Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes

6y

It just depends on your preference. Personally I prefer to control my own portfolio because I know I can generate higher returns myself. But I see why many people choose the syndication route also. I think a lot of people start off doing their own deals, and by the time they get to accredited, they just enjoy the deal making themselves, I know I do. I use property management on all my properties, but I love doing the deals still. At some point, who knows, I may decide to sell my portfolio and roll it into syndications...or may decide to start my own!! Good luck!!

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Daniel Kong

Rental Property Investor · Honolulu, HI · Member since 2018 · 335 posts · 251 votes

6y

Both are good options. The BRRRRing strategy is a WAY higher ROI if done right. But it is more active. Syndications are very passive where you just hand someone your money and let them go. Usually people do active investing (BRRRR, flipping, etc), then when your net worth is high enough you become a private lender (to flippers or syndications) The smaller ROI is worth it for the less effort involved.

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Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

6y

@Johnny Lau

I think it’s a personal preference. I started active because I didn’t have the capital to be passive, yet. Now I’m getting to the point where I can be passive. I’ll probably be more passive in the asset classes I don’t know-like mobile home parks, and active on the ones I do know - MF and development. I think once you know how much work it takes to be active and get high returns then you’re happy to give up some of the deal and let someone else do the work. But like someone else pointed out it’s fun to do the deals yourself.

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John FortesPro Member

Multi-Family Syndicator · Abington, MA · Member since 2017 · 603 posts · 347 votes

6y

You ask a great question and quite frankly there is no real honest answer. Only YOU or the INVESTOR can truly answer that. If you want to control your portfolio then continue to buy and operate your own assets. Now if you want to just focus on those first 10 and you want to continue to leverage others to continue to build your wealth through syndications, then that might be the route for you. It's all about personal preference. End of the day, factor in the time and you can decide for yourself what direction you want to go in. Happy investing!

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Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

6y

Here's what I found: in reality, not all MF syndication work out especially if you're late in the game. Many MF Syndication deal is also not in favour of Investor (eg: skin of the game/waterfall/fees etc). You need to vet the sponsor extremely carefully and that's only if you understand what they're talking about and trust them (this is the hard part). Also, the process of doing DD to MF Syndication is much more difficult than DD for regular RE deals.

And most importantly, for RE, it's under your own control and name. I'm reading Investors complaining every day regarding MF Syndication.

For me, if you're accredited anyway, I prefer Alternative Investment outside RE other than MF Syndication if you're looking for better return. It's possible to reach 20-30% IRR for uncorrelated non-RE assets. I'd rather invest to Funds of Funds that invest on uncorrelated assets.

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Ian IppolitoBusiness Member

Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes

6y

Originally posted by @Johnny Lau:

I was wondering why an investor would continue buying houses and small apartments, building up their portfolio to dozens of doors or more. They keep brrrr-ing and brrr-ing and then get to 10 loans, then I guess they get private money or portfolio loans to continue acquiring more doors. At that point, they are probably an accredited investor and can buy into syndications which give very favorable returns. The General Partners do all the work and the Limited Partner goes for the ride and gets good cash flow and shares in the profits while being totally passive. The syndicators have the track record (easy to check with a little research) and do all the work, vetting properties, etc.

So, why buy SFRs and small multis when you can just buy into syndications and kick back and let the pros do all the heavy lifting? After acquiring 10+ doors, instead of adding more doors, why not instead of buying 10 more doors, buy into 10 different syndications? I've done some research and partnering with the pros just seems like a better choice. I've just started investing into them and am looking to scale. What would you do?

Johnny, I think you're asking a great question.

In my opinion both direct ownership of property and passive investing have their pros and cons and I think the ideal portfolio has both.

The main advantage of direct ownership is the ability to put in sweat equity. When an investor has more time than money, they can use this to increase their return. The other advantage is that the investor has complete control.

On the other hand, many times a new investor doesn't know what they're doing and makes expensive mistakes. And sweat equity takes time and effort, and not everyone has the inclination or ability to do that.

When someone invests passively, the work is in doing the due diligence at the beginning and then they are essentially done. Passive investing also makes it easier to diversify into multiple properties, multiple asset types, multiple geographies and multiple strategies for the same investment as purchasing a single direct property. So this can make a portfolio safer. Also, if the investor chooses well, the investment is managed by someone who is years more experience than the investor can ever hope to acquire. So they may avoid expensive mistakes.

On the other hand it does require being able to do that due diligence and since it's a lot more difficult than selecting an index fund, not everyone can do it. It also requires having the ability to turn over control to someone else which not everyone can handle. And ultimately it does usually require having more money so is generally good for those who have more money than time.

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Ronan DonnellyPro Member

Investor · New York City, NY · Member since 2012 · 332 posts · 385 votes

6y

@Johnny Lau, it’s a great question. I started with single family homes and once I got to close to 10 I realized that I had created a full time job for myself. I ultimately switched to syndications firstly as a LP investor and subsequently as a GP.

Some of the things that I love about syndications are:

1) They are entirely passive post investment and they enjoy all of the benefits of physical real estate ownership (appreciation, depreciation, LT cap gains, cashflow, 1031 exchanges etc.)

2) I get access to professionals in return for a fee

3) I can more easily diversify across geographies and asset classes

SFH's are popular because they require less capital to get started but many people who started there ultimately end up syndicating larger assets.

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Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

6y

Originally posted by @Johnny Lau:

I was wondering why an investor would continue buying houses and small apartments, building up their portfolio to dozens of doors or more. They keep brrrr-ing and brrr-ing and then get to 10 loans, then I guess they get private money or portfolio loans to continue acquiring more doors. At that point, they are probably an accredited investor and can buy into syndications which give very favorable returns. The General Partners do all the work and the Limited Partner goes for the ride and gets good cash flow and shares in the profits while being totally passive. The syndicators have the track record (easy to check with a little research) and do all the work, vetting properties, etc.

So, why buy SFRs and small multis when you can just buy into syndications and kick back and let the pros do all the heavy lifting? After acquiring 10+ doors, instead of adding more doors, why not instead of buying 10 more doors, buy into 10 different syndications? I've done some research and partnering with the pros just seems like a better choice. I've just started investing into them and am looking to scale. What would you do?

I agree with everything you wrote in your post, but I don't agree with the title of your thread. Everyone's experiences vary, but without question direct ownership of property has had a lot more upside for me.

We've had 10 years of economic prosperity and in that time, syndicated investments have provided a good way for accredited and qualified purchasers to stay well ahead of inflation, put their money to good use and earn a nice equity multiple. On the other hand, direct ownership has brought the type of changes in my life where I can start considering myself financially independent.

3 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

6y

Unfortunately, it's not that simple. These opportunities carry a lot more execution and market risk than advertised; hence, the high returns.

I invest both actively and passively and they both have their pros and cons. This question is more nuanced than just an investor's goals and control preferences. It's about the properties...and the operators...there are good, average, and bad ones for both. And about the commercial real estate market.

7 Reply

John Drowns

Investor · Kansas City, MO · Member since 2019 · 18 posts · 13 votes

6y

Good points @Mike Dymski. The choice in Sponsor is paramount in syndication investments. I would caution on syndicators who have only just appeared during this robust climb where it seems everyone is making money regardless of skillset. Does the Sponsor have history through an economic downturn, longevity overall as a company, and are they commercial real estate practitioners in more than just the syndication space? Some could make the case that there are a lot of Sponsors out there that are heavily weighted in the C space. Will those properties weather the impending contraction as well as an A? Maybe for another thread but something to think about.

5 Reply

Daniel Schiller

Rental Property Investor · Houston, TX · Member since 2014 · 91 posts · 76 votes

6y

@Johnny Lau because a lot of investors don’t like scheduling meetings to ask the GPs why their numbers are jacked... which is how I get to spend this lovely afternoon extracting info on a golf course community.

Syndications are truly passive... until they aren’t. We don’t invest in them anymore. But I’m always happy to raise a fund. You are investing in the managers, not the properties.

1 Reply

Will GastonPro Member

Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes

6y

@Johnny Lau Control. It's a personal preference but I get to make the decisions when my name is on the deed. IMO that's the reason so many people love real estate as opposed to 9-5 jobs. More control.

3 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

6y

Great answer from John and Daniel. If they were survived during 2008, they're good. Also, I think MF is more like an "appreciation" game rather than cash flow business where they make the most money usually after selling the asset which is actually semi speculative and very dependent on the macroeconomic condition, including wage growth.

So not just you're investing on the Managers/GP, but you also need to feel bullish to the economy until the asset is sold. I think it's important to see a cap rate trend and where your investment would be.

If you invest directly, the macroeconomic level is not the first priority because you can create your own game and scenario for the future.

1 Reply

John Drowns

Investor · Kansas City, MO · Member since 2019 · 18 posts · 13 votes

6y

@Carlos Ptriawan - good add to the macroecon that is, of course, relevant. If I had the access to capital and knew how macro economics affected real estate in a particular area better than a Sponsor, I would either always do my own deals, or find a different Sponsor. Like everyone has said, I believe it is a question of personal strategy and assumptions one is comfortable with, rather than there being greater or lesser path to travel. Great nuggets from everyone on this thread!

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Syed H.

Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes

6y

Plan and simple: you make more money running deals.

Syndications are great for passive investors.

Being the GP, is one of the most lucrative positions to be in RE for people that have the capability.

1 Reply

Reginald Ross

Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes

6y

@Johnny Lau

Control. Things can get tricky when you venture outside of a single member LLC arrangement.

I’m not saying that a syndication is a bad idea but my #1 rule has always been to control 100% of the equity in my business.

I can take own debt investors if I like but the equity is mine to do whatever I want with without having to run it by anyone else.

Also, most investors who plan on doing this for the long haul don’t take out loans in their personal names so the Fannie/Freddie 10 loan limit is a moot point for them.

I know a guy with >180 doors and his primary residence is even held and financed through his LLC.

0 Reply

Taylor L.

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

6y

Control & time. Not everyone has the time to run their own BRRRR projects. Not everyone wants to build their own real estate business. Some just want exposure.

There's nothing written in the stars that you can't do both. As @Ian Ippolito said, it is probably a prudent decision to do your own deals and invest passively.

1 Reply

Jerome Myers

Rental Property Investor · Greensboro, NC · Member since 2019 · 24 posts · 5 votes

6y

@Johnny Lau the returns from active investing "should" be higher than passive. I lead apartment deals and look to help others get in the business because it is one of the best ways to grow wealth. You "buy" into a syndication... you don't get a dollar of equity for each dollar you put in the deal... you normally get 65 to 80 cents.... you pay a fee for the acquisition and each capital event... in addition to the asset management fee... As far as track record as with any investment past performance does not dictate future... there are many things outside of an operators control... so the deal can go sideways and as a LP you don't have a vote on what happens.

0 Reply

John Wright

Real Estate Agent · Cincinnati, OH · Member since 2017 · 51 posts · 63 votes

6y

@Johnny Lau I like the idea of syndications for the same reason I like multifamily, scale. I individually do not have the resources to fly to every growth market in the US to look for deals but if this whole thread was to pool our capital we just might be able to. The bottom line is that real estate is about economics and the more resources you then have to continually seek out new markets for growth and to track macro indicators the better chance you have at consistently getting returns for your investors.

0 Reply

Huan Nguyen

Investor · New Zealand · Member since 2020 · 14 posts · 18 votes

6y

I've been thinking about this myself too. Aside from what everyone else has mentioned, I think for someone who's just starting out but has time and knows the market well, doing the small deals would be a great way to quickly learn and grow your confidence. If you don't know the market too well and want to learn from observing others, then syndication is a great option. I remember reading in the book How to Win in Commercial Real Estate, Craig Coppola said he started out investing passively, then once he'd formed his own views and gained confidence from watching the sponsors, he switched to doing a lot of the deals himself.

0 Reply

Aaron Taylor

Olathe, KS · Member since 2018 · 148 posts · 207 votes

6y

Having been involved with both and looking more into both for future investments, this is what I'd say:

You can get into SFR's or small multi's with a lot less money or creative financing

The better the sponsor (or at least more in demand), the higher the minimums they require usually. This makes it hard to diversify.

My syndication stuff has beaten my worst properties but not my better ones. I don't see it ever beating my better properties. And from my research, that seems to be about par for the course.

You can recover from a bad SFR mistake a lot easier than a syndication mistake, as time will usually recover all mistakes there.

The syndication stuff is less work for sure once it gets going. But if you have a property manager, you personal properties aren't that much work either.

Personally, I think you should have both. And start with the local active stuff and then gradually rotate into syndicates. It also depends on where you live, if you're trying to invest out of state then I'd much rather do syndicates then rather than trying to SFR suff.

3 Reply

Curt Neider

Lender · Salt Lake City, UT · Member since 2019 · 40 posts · 17 votes

6y

@Johnny Lau

The main issue in my mind is the law of diminishing returns. (Maybe the wrong name? Law of large numbers? I didn’t audit this thesis.)

When you are starting out, you have less money and more ability to focus on a project. If you are BRRR'ing correctly and can get all of your initial cash out of each deal, hypothetically your ROI on each deal goes to infinity. As you continue to grow, at some point cash is no longer your issue but where to find good deals, managing rehab, etc.

I’d like to hear if I am wrong, but you will never get the same type of returns?

I'd also like to chime in that you can own as many SFR rentals as you want. 10 is a limit relating to conventional loans so you just have to switch lending partners/strategies at some point.

0 Reply

Allan C.

Rental Property Investor · Member since 2018 · 826 posts · 810 votes

6y

@Johnny Lau you have better control over tax efficiencies buying and holding yourself.

0 Reply

Johnny Lau

OP

Investor · San Jose, CA · Member since 2015 · 89 posts · 46 votes

6y

Lots of great ideas and feedback here, thanks for all the valuable information given. I feel that I'm at a turning point in my investing future and will most likely focus on finding more syndications to partner into. I am working with 2 syndication companies that look very good and I plan to jump in again soon. I like the passive part of investing at this point, but I will still consider something local if it's a great deal. My portfolio consists of local properties (most are located about an hour south of the Bay Area), OOS (turnkey and mls), and now syndications. I am leaning towards being more of a passive investor than actively looking for a great deal. To be honest, I'll probably continue to do a little of both!

1 Reply

Stephen KeigheryBusiness Member

Rental Property Investor · New Orleans, LA · Member since 2018 · 716 posts · 555 votes

6y

I think you can do both @Johnny Lau. There are valuable skills you learn investing actively and it can be a great place to start. I think you need those fundamental skills to help you assess whether a syndication deal is good and if the management team is competent.

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Why buy SFRs or small Multis if Syndications have more upside?

Why buy SFRs or small Multis if Syndications have more upside?

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