Help! Investing in Large Apartment Syndications and can't stop!

[Andrey Y.]

The last property I bought has been about 18 months ago. Due to getting into a bunch of new hobbies/interests which take up a good chunk of my free time, I have been putting my dollars bound for investments into large apartment syndications primarily (and maybe only 20% of investable capital into index funds).

Is there a problem with this? It seems like IF I am able to earn a 14-18% IRR completely passively, with tax benefits translated to me, what is the point of buying leveraged rentals to earn 15-25% but spend valuable time managing them?

Is there a point where you wouldn't put so much capital into apartment syndications and go another way? Like private lending or note investing perhaps. I am not too familiar with either. Outside of purchasing my own 32+ unit building, I am just not seeing a huge benefit in the active investing of rentals vs. passive syndications. Appreciate your thoughts on this guys!

[Ian Ippolito]

@Andrey Y., I have a considerable part of my portfolio in both single-family rentals, and syndication/crowdfunding investments.

For people who are cash poor and have lots of time on their hands, an all single-family rental portfolio makes sense, because they can put in a lot of sweat equity. If you have more money or less time, then passive investing starts to make more and more sense. As a very conservative investor, there's one more advantage to me of directly owned real estate: I'm able to configure the deal to be much more conservative ways than is possible through 99% of the passive offerings out there (i.e. no debt). But most people are not that conservative and actually prefer the higher projected returns that come with a higher risk of higher leverage, so this isn't an advantage to everyone.

To answer your question of "is there a problem with this", though, I would say "yes". Try googling "the apartment recession of 1972" and you'll see what can happen if you put all of your eggs in one basket. They also did badly to the S&L crisis, but on the other hand held up better than single-family houses in the last recession. So the solution, in my opinion is diversifying.

Others have mentioned diversifying on this thread into other commercial real estate asset classes, and to me that is a first step, but not enough. I would go two steps further. I would recommend diversifying three ways:

1) capital stack location: debt versus equity.

2) commercial versus residential (you can invest in single-family homes through passive investments as well)

3) commercial real estate asset class types (mentioned by others such as medical, fast service restaurants, retail, etc.)

Each of the different choices has a different risk reward profile, so it's important to first understand what those are, then take a look at your own risk profile, and then come up with a game plan of how you want to structure your portfolio for diversification. If you don't, and just look at deals, the most likely you'll end up with a portfolio that is way out of whack on risk.