What beats apartment syndication returns for passive income?

[Kurt Granroth]

Say I am an accredited investor and I want to allocate $500k for a type of investment that should be capital preserving; completely passive; and generates $100k annually in income.  In general that's a tough row to hoe, as the classic truly passive income flows almost never get near 20%.  But it does seem like even (relatively) conservative apartment syndication deals do hit that mark, over time.

Here's my thinking.  I take my $500k and I invest it into apartments in an investment ladder, with $100k invested each year.  That could be one property at $100k or two at $50k each.  Each year I invest $100k more until after year five, all of my cash is in between 5 and 10 apartments.

A typical deal, from what I've seen, may return 8% annually in dividends and 175% (including initial investment) during a sale in year 5.  That's a 2.1x multiplier.  This is what it looks like to me:

The 8% isn't a lot and it will increase to only $40k a year when all $500k is in play.  But on year 5, I get the original $100k back plus an extra $75k, leaving my annual return at $115k -- just above my target.  I then take my returned capital from year 1 and invest it again.

After this, there's always my one or two properties from 5 years earlier going up for sale, and so my annual return will stay at $115k (22%) indefinitely, until I finally stop the ladder.

When that happens, I will temporarily have an extra $100k each year for 5 years.

On the surface, this seems like it beats pretty much all other truly passive investments for annual income generation.   Therefore:

1. What am I missing?

and

2. What is better than this?

[Kurt Granroth]

@Daniel Dietz, yes, I started with my plan last year and successfully found an apartment syndication in Texas with projected higher returns and a similarly higher risk plus a storage unit syndication in Florida that was a bit more conservative.  I'm really liking the mix of geographical locations, market influences, and risk levels.

This year I'm hoping to find some suitable deals that are maybe even more conservative than those.  It really feels like we are right at the end of the current high in the cycle and I have very little faith that it'll continue for the next five years.  So I'm going to focus less on the five year projections and more on how stable the investment will be if it all crashes next year.  Low debt; long  term fixed rates; and conservative to the point of pessimism assumptions on attributes like vacancies and price increases will all be very important factors!

I also discovered relatively recently the idea of "funds" that encapsulate multiple real estate deals. Those sound on the surface not unlike an REIT but they apparently aren't and they do require being accredited to participate. I know extremely little so far but the idea of a relatively high return "income fund" that could still be "safer" than an individual property is intriguing and worth a look.