Private ownership or syndication? (Noob question)
Member since 2022 · 7 posts · 4 votes
Hey all! I'm trying to learn about real estate and have a pretty basic question:
What are the differences in returns of privately owning a home and renting vs. investing the money in a real estate syndication. Are these even directly comparable?
Let's suppose I have $50k. I know the time horizons are quite a bit different and the strategies can vary wildly, but generally what changes if I owned houses for 30 years vs. invested in syndications for 30 years (in the normal 3-7 year increments, rinsing and repeating)? Is there a big difference in what I could expect in the end?
Again, I'm really knew to this and just want to get my head thinking right. Sorry if these are really bad questions/too general :)
Thanks for any help!
There are a lot of variables involved with your question, so I'll try to compare and contrast the two investment options. These are really two separate animals.
#1 PASSIVE. If you can find a good deal on a single family home rental (SFR), you may get higher returns and you are 100% in control of your investment, but you will also have more hands-on work. If you pay a property management company to do all the leasing and work for you, it will probably be about the same return on investment. Sweat equity can increase some of your returns if you're willing to put in the time.
#2 VACANCIES. There is an advantage to a syndication, because you'd be investing in something with multiple units and so vacancies are less impactful on the bottom line. If you rent a single family home, you only have one unit to take the loss for the vacancy. As a side note, you will eventually want to get more single family homes, so your total investment isn't riding on one property and vacancies in one home can be spread across all of your properties. By the way, you shouldn't be vacant for more than 5% of the year, basically 1-2 weeks in between tenants.
#3 DEAL ACCESS. Syndications have access to larger and sometimes better deals because everyone is pooling their money together, so they may be able purchase more desirable/expensive properties that a single owner may not be able to afford themselves alone. Typically when buying a single family home, you are competing against home buyers, there's less of a market for people able to afford to purchase a 48 unit apartment complex.
#4 LIQUIDITY. With a single family home, you can sell that on the open market at any time, with or without a tenant. With a syndication, there is typically a minimum amount of time you must be invested and so there would be less liquidity to cash out your $50K, if you were to need access to your capital.
#5 SUMMARY. I think this all comes down to how active or passive you wish to be with your investment. If you want a hands off approach, I would look at a syndication. If you're not afraid to get involved with the business, you could choose to do single family homes.
So you will probably have a hard time getting into a syndication for 50k. Most syndications require their investors to be "accredited" which if you google you can see if you meet the requirements for. Furthermore, most have a 100k min.
The way to think about a syndication is you are investing more in the operator of the syndication than the property itself. Most syndication deals give the operators a portion of the equity, 30% is pretty common, and they put up little to now money for that 30%. This makes sense when you have someone or a group that has worked to find a great deal and knows how to execute it. Most syndication deals are driven by a 3-7 year exit strategy where they sell the properties and that is the primary way everyone gets paid, so the operators have to be able to know how to add value. With today's very low cap rates, this is easier to do. If you can find a 100 unit complex for example, that generates net operating income of $800 per unit that is at a 5 cap, this is a 19.2m dollar property. If the operators can figure out how to increase rent by a few hundred dollars a month in year 1, then $150 a month each year for the next 5, which directly impacts NOI, and the units make $1850 per month in year 6. Assuming the cap rate holds at 5, this property is now worth 44.4m dollars. So the 70% of the property the investors paid 19.2m for is now worth 31.08m. These are all hypothetical, but this is how syndicators can take a chunk of the deal and have it still make sense.
I think it is probably good to start doing it yourself to learn more about the business, which makes it easier to vet syndicators. The deals will not be as big, but if you put the work in you can make money. I currently have a 28% average annualized return on my properties in Iowa(all of which I got into at about or under 50k), which is much higher than the annualizes 8.5% return the hypothetical syndication deal that I described above makes.
One big thing I would be concerned about in syndication deals today is cap rate increases. We have benefited from an oversupply of money over the last 10 years that has driven down cap rates. If inflation forces cap rates higher (in my mind 50/50 chance) it will really hurt most syndication deals. With respect to the deal above, if that cap 5 turns into a cap 7 when you go to exit, the 44.4m exit value falls to 31.7m. The deal does not lose money, but it gets a lot less juicy.
There are a lot of variables involved with your question, so I'll try to compare and contrast the two investment options. These are really two separate animals.
#1 PASSIVE. If you can find a good deal on a single family home rental (SFR), you may get higher returns and you are 100% in control of your investment, but you will also have more hands-on work. If you pay a property management company to do all the leasing and work for you, it will probably be about the same return on investment. Sweat equity can increase some of your returns if you're willing to put in the time.
#2 VACANCIES. There is an advantage to a syndication, because you'd be investing in something with multiple units and so vacancies are less impactful on the bottom line. If you rent a single family home, you only have one unit to take the loss for the vacancy. As a side note, you will eventually want to get more single family homes, so your total investment isn't riding on one property and vacancies in one home can be spread across all of your properties. By the way, you shouldn't be vacant for more than 5% of the year, basically 1-2 weeks in between tenants.
#3 DEAL ACCESS. Syndications have access to larger and sometimes better deals because everyone is pooling their money together, so they may be able purchase more desirable/expensive properties that a single owner may not be able to afford themselves alone. Typically when buying a single family home, you are competing against home buyers, there's less of a market for people able to afford to purchase a 48 unit apartment complex.
#4 LIQUIDITY. With a single family home, you can sell that on the open market at any time, with or without a tenant. With a syndication, there is typically a minimum amount of time you must be invested and so there would be less liquidity to cash out your $50K, if you were to need access to your capital.
#5 SUMMARY. I think this all comes down to how active or passive you wish to be with your investment. If you want a hands off approach, I would look at a syndication. If you're not afraid to get involved with the business, you could choose to do single family homes.
Ethan,
@Peter Albanese is correct, it is really about your time and how active you want to be. I have met more people that are no longer in real estate because they bought 1 unit and it went bad. Today the market is full of challenges related to interest rates and values.
The Earn while you Learn approach is a good one. Invest with an experienced syndicator and learn how it is structured and make money along the way. Or get a broker that you trust to launch your active investing efforts.
Comparing the two is very difficult. Every investment varies especially in SFR market.
Conversely, syndications in value-add multifamily will target close to a 3-5yr hold and return almost 2X equity multiple and you will have significant tax benefits. They will assist with a 1031 into the next deal if needed. You can rely on an expert to find the asset, run the project, create value, driving up rents and reducing costs, working to meet/exceed investor expectations.
And there are very experienced syndicators that have non-accredited projects that take $50K.
Good Luck
Joe
There are many varying factors for a definitive answer. I would look more at what your long-term investing goal is. Do you want to be truly passive in your portfolio? Then syndication as an LP might be a good route. Or do you want to be actively involved in the decision making and overseeing property? Then buying your own deals and scaling that way might be the best route.
Alternatively, you could try doing both and see what you prefer over the next few years.
You have some good responses here! I think the most important question for you to answer is do you want to be active or passive?
I tried to be what I thought was a passive investor by buying turnkey single family homes and small MF and hiring property managers. It was not passive. I was the asset manager - I had to find the properties and manage the property managers. Very few of my properties cash flowed how I expected them to and I was constantly changing PM's in order to find someone who could do an adequate job. I was not a good asset manager - but I was lucky and the market saved me and I made money on every property - through appreciation not cash flow.
Since then, I have sold all of my active investments (the ones I thought we passive) and got into true passive investing through syndications. I now effectively hire an asset manager, a professional - their job is to manage the asset for me. My returns are as good or better than my active investments. I think this is a place of misunderstanding for many people. If you are an active investor, it is possible to beat the returns of a syndication - but you need to know what you are doing, be in a market where you have some type of advantage and knowledge and you need to be active - you cannot rely on others to manage the asset for you. If you can't do all that, I think you have a much better chance of success in passive syndications.
Also, it is not correct that you have to be accredited or that the minimums are $100,000. I am in many syndications with a $25,000 minimum and some of these investments allow non-accredited. You will certainly have fewer options if you are not accredited, but there are plenty of investment options for you. You could also use a group investing platform like Tribevest who specialize in helping groups invest together - this will help you lower minimums, increase your diversification and give you an instant network of people to learn and grow with.
The most important aspect of passive investing in syndications is finding quality sponsors and deals - the best way to do that is to join a specialized Community of people who are doing the same thing.
Good luck!
There are a lot of variables involved with your question, so I'll try to compare and contrast the two investment options. These are really two separate animals.
#1 PASSIVE. If you can find a good deal on a single family home rental (SFR), you may get higher returns and you are 100% in control of your investment, but you will also have more hands-on work. If you pay a property management company to do all the leasing and work for you, it will probably be about the same return on investment. Sweat equity can increase some of your returns if you're willing to put in the time.
#2 VACANCIES. There is an advantage to a syndication, because you'd be investing in something with multiple units and so vacancies are less impactful on the bottom line. If you rent a single family home, you only have one unit to take the loss for the vacancy. As a side note, you will eventually want to get more single family homes, so your total investment isn't riding on one property and vacancies in one home can be spread across all of your properties. By the way, you shouldn't be vacant for more than 5% of the year, basically 1-2 weeks in between tenants.
#3 DEAL ACCESS. Syndications have access to larger and sometimes better deals because everyone is pooling their money together, so they may be able purchase more desirable/expensive properties that a single owner may not be able to afford themselves alone. Typically when buying a single family home, you are competing against home buyers, there's less of a market for people able to afford to purchase a 48 unit apartment complex.
#4 LIQUIDITY. With a single family home, you can sell that on the open market at any time, with or without a tenant. With a syndication, there is typically a minimum amount of time you must be invested and so there would be less liquidity to cash out your $50K, if you were to need access to your capital.
#5 SUMMARY. I think this all comes down to how active or passive you wish to be with your investment. If you want a hands off approach, I would look at a syndication. If you're not afraid to get involved with the business, you could choose to do single family homes.
My vote goes to this one from @Peter Albanese!
And to directly answer your question regarding what to expect in terms of differences in return, holding and owning a good, directly owned property for 30 years will outperform investing in syndications for 30 years. But as mentioned by Peter, it will require more work.
Build up your portfolio with direct properties for a while. As you build up your assets and knowledge and also get accredited or become a qualified client and want to be more passive, then look into syndications. It's true you don't need to be accredited to invest in syndications, but the deal structures are far better for investments that are limited to accredited to qualified clients.
I think there is quite a bit of misinformation out there about non-accredited deals. If you want to be active - definitely go for it! But if you want to be passive, you can do it even if you aren't accredited. As I mentioned, I am in quite a few deals that accept non-accredited investors. The terms are no worse or better than the standard syndication - sure, you can get better terms if you are investing $1M in one deal, but most people aren't doing that even if they are accredited. My point is you do not need to be limited by you non-accredited status. There are quality opportunities for investment - and certainly better than 8.5% returns. You can get that or close to it in cash flow and the appreciation on the back side could get you close to a 2.0 multiple (though that is harder these days than in the past).
My returns are as good or better than my active investments. I think this is a place of misunderstanding for many people. If you are an active investor, it is possible to beat the returns of a syndication - but you need to know what you are doing, be in a market where you have some type of advantage and knowledge and you need to be active - you cannot rely on others to manage the asset for you. If you can't do all that, I think you have a much better chance of success in passive syndications.
Thank you so much for the thoughtful response, Jim. You put words to my hunch. Private ownership seems so cut-throat, and success seems reliant on providing more effort/knowledge. I value the passivity and believe that an expert would achieve better results than me (even factoring in their cut).
Have you personally used Tribevest? I will look into it if you know from experience that it's good.
Thanks again!
@Ethan Carbonaro, I will reiterate what Jim mentioned. Just because a sponsor raises under exemption 506(b) and can take non-accredited investors, it doesn't mean there is anything wrong with the sponsor. But the same can be said about 506(c) offerings, they aren't inherently any better simply because they can ONLY take accredited.
And back to your original question, there are too many variables at play. I used to work for a retail operator/syndicator, that when I left the company in 2013, still owned their first property, bought in 1992. That property, back then, had yielded a 5 multiple and was still averaging an IRR net to LPs north of 20%. They had refi'd many times over in the 20 yrs they owned at the time, and some of those investors were making near $100k/yr in distributions on initial investments of $300k. But it was a full redevelopment, tear down the anchor, rebuild, etc.
There are also people that lost everything in the financial crisis, syndicators and homeowners, a like. So, it depends on the property, the sponsor, the business plan and execution, the availability of capital to carry you through tough times, etc.
This is super valuable; thank you, Evan. Great insights. I especially love those four factors you mentioned when picking a syndication: property, sponsor, plan, and execution. Do you have any recommendations for how I can learn more about picking the right syndication?
Thank you again!
I would say that syndications offer a passive way to invest in real estate but with no benefits of actually owning it yourself. When you privately own a rental home, you are able to reap the benefits of appreciation and a longterm resident paying down the mortgage on that property. Eventually, that property will be paid for on borrowed dollars and you will own the home. SFH are known to attract better residents and are easier to liquidate. Not to mention all the tax write offs!
There are passive ways to invest in SFH real estate, while still receiving the benefits of owning the property out right. I would suggest looking into turkey real estate investment companies. Feel free to reach out if you would like to discuss turnkey real estate. @Ethan Carbonaro best of luck with all your future investing!
The big thing I see folks missing out is most passive investors when buying little rentals are doing the buy hope pray model where they are relying on market appreciation... cashflowing or not.
A syndication typically has a business plan to bump the NOI and evokes forced appreciation/value add.
Hey all! I'm trying to learn about real estate and have a pretty basic question:
What are the differences in returns of privately owning a home and renting vs. investing the money in a real estate syndication. Are these even directly comparable?
Let's suppose I have $50k. I know the time horizons are quite a bit different and the strategies can vary wildly, but generally what changes if I owned houses for 30 years vs. invested in syndications for 30 years (in the normal 3-7 year increments, rinsing and repeating)? Is there a big difference in what I could expect in the end?
Again, I'm really knew to this and just want to get my head thinking right. Sorry if these are really bad questions/too general :)
Thanks for any help!
This is more about your goals. If you are buying real estate to generate passive income, then a syndication is the better route. If you are trying to be active, then direct ownership is a good route. As for returns, your mileage will vary. Single family homes tend to look good on paper, but are often difficult to produce long term, consistent results. The value, though, is that if you buy right and can refinance your money out and continue to cash flow, you can buy 2+ homes with that original investment.
With a syndication, your returns are a bit more predictable, however, like any investment they can vary depending on the location, economy, operator and other various factors.
In my early days I was buying 1-4 family homes and was making some good cash flow on most. Returns have been anywhere from low teens AAR to triple digit AAR. Our syndications have produced 30% AAR to as low as 16% AAR, with a few looking to be 50%+ AAR if we sold now. Again, market timing and many other factors play into returns.
Hello @Ethan Carbonaro, you have very high value opinions from experienced people, I wanted to add something that either way you choose, I recommend you study a bit more about both ways and with all those opinions get your own conclusions because every case is different, the market and remember that everyone's goals and the way you do things are different!! Get some knowledge and some network and I'm sure you will get there!!
As one assesses RE projects and deals; I tend to promote the question : Are you in expert fields that can break you? Are you an expert negotiator? Do you have real estate expertise? do you know plumbing , evictions, roofing, concrete, residential law WELL? Owning SFR or small projects passively is never passive and losing is very active.
I think the odds are against a single small time investor with littlE staying power.
now going into a syndication it is a formal rehearsed plan: the costs and problems have been researched, there is experienced project mgr hired and even lawyers on standby to protect the project, property managers ready to reminder, collect , evict tenants rightfully and plumbers, electricians, trades mens will all go to a syndicated project any day than a small time landlord to do business.
In syndications you bet there is strength in numbers. Your $50k is giving you access and influence on a deal over someone with $20k.
I’m a fan of syndications because the road is clearly laid out with redundancies with professionals at every step of the way and I’m willing to pay or give $$ for its success. As I started out investing in small units, I never knew what to do in 3,5,8,10 years besides doing the same: hold on. Essentially I have zero plans. Syndication: golden map to force appreciation on a large scale flip.
Lastly, many of the people who answered are older and may have invested int he 80s, 90s and are reaping huge benefits. As I type and as someone read this, there was NEVER been these forums or tools available so those early investors are talking about a time that will never occur again where little education will reap huge rewards.