Syndication VS Rental Property Calculator?

Question

Has anybody out there seen a nuts and bolts spreadsheet or calculator comparing investing in syndications versus owning a rental property over the long term?  Before I spend a week creating it, I'm hoping to get a head start.

It would need to include all of the assumptions and inputs pertaining to each including:

1) Loan details

2) Appreciation rate

3) Rental growth rate

4) Capex rate

5) Market rental rates

6) Reinvestment rate

It would have to include the amortization schedule of the loan, and include the 3 ways of making money on a rental including the principal paydown, cash flow and appreciation.  Including taxes would be great too.  All of the inputs/assumptions would be plugged in then compared to the return of a syndication.

Hoping to spit out a graph showing an easy comparison between the two.  My hunch is that over the long term, the syndication is going to far outpace the rental property, especially when you consider the long term appreciation rate of the SFH.  Anyway, thanks in advance for any responses!

Llewelyn A. · Answer

@Bruno Araujo

I'm a believer in comparing various investments by using a series of Cash Flows over at least a 10 year period of time. Then you boil it all down to a IRR Calculation.

This is a GREAT approach and I believe you are on the right track in your description above.

We call these projections pro-forma and it becomes the centerpiece for a business plan.

There needs to be some analysis on the actual manager of the projects, however. There is risks associated when the numbers work out, but the management has no experience.

In other words, if you show a comparison between an Investment of a JV among Partners versus buying into a syndication, a comparison between experience and knowledge of the management of the two investments should be made.

In fact, I used to put together pro-formas that compared Real Estate Investing to blue chip stocks. These spreadsheets have proven to be highly accurate once you made good assumptions.

I will say that one of the reasons why I'm a Real Estate Investor versus a Stock Investor is because of the Amortization of a fixed rate Mortgage. The fact that a fixed rate Mortgage Balance is reduced over time is a mathematical guarantee.

As long as the quality of the tenants are available to the location of the investment, you were certainly able to capture the profit from the Amortization of a fixed Rate Mortgage.

Over the decades, my pro-forma models have proved this to be a very compelling reason and time has proven it to be both accurate and profitable.

This Exercise will teach you a lot about Investing in General and you will have a huge advantage over someone that only knows a single way of analyzing just one specific investment or using one specific calculation.

Continue the good work!

Bill F. · Answer

@Bruno Araujo Your sale pitch reminds me of this movie scene.

You are trying to sell your investment by convincing people that another investment is worse. Sure, it will work on some folks, but are those the type of people you want to run money for? Why not simply focus on highlighting the pros and cons of your own deals and letting investors choose you among all the opportunities in the investing universe based on your merits?

Anyway, there are far to many variables to account for to say that over the long term owning a small portfolio of rentals produces lower returns than a series of syndication. You asked how can long term rentals compare? Long term rental ownership has no transaction costs, broker fees, capital gains, depreciation recapture, asset mgmt fee, cash drag, equity split, sponsor investor misalignment.   In this twenty year time horizon you'll go through at least three cycles of a lot of those.

It can't hurt to have some comparison in your pitch deck like this, but I know from my point of view if you spent a lot of time telling me I should invest with you because I'd get better returns than rentals, I'd smile, nod, and never call you back.

Maybe what you are hearing about rentals is really a polite no and not a true issue that's keeping the potential clients from from investing in syndications.

Greg Scott · Answer

Realistically, I don't know how you could do this and have it mean anything.   The investment strategies are like comparing apples and oranges.  More important than some hypothetical "typical return" is your investment philosophy and the constraints and goals you have.

What also makes this hard, is what are your inputs?  In any one of those three types of investing, I can find specific properties have have hit grand slam home runs and other that are failures.   Given that each investment is unique, how can do 'typical' result help?  I'd do any one of them if it were the right investment.

Tony Kim · Answer

Just like any syndicated deal I look at has different COC, IRR, and Equity Multiple numbers, so would most of the numbers for any direct purchase. It's all deal specific. How are you going to make a case for the syndicated route unless you are talking about the same property? It's difficult to make this type of comparison without really defining what a "typical" property is.  Also, making a case that syndication is better because of a higher return is not the type of thing that should resonate with an experienced investor.An experience syndicator will be able to get better commercial financing terms, more experience at forced appreciation, many years of experience without losing money during the great recession (at least that's the case with the syndicators I invest with), better access to deals, and more connections when selling the property at the end of the investment period. But these additional benefits come at a cost, such as having to pay management fees, waterfall split (and sometimes catch-up), lack of control, etc.

Bruno Araujo · Answer

@Greg Scott Thanks for the reply. I agree with you: All of this is very much deal specific. There are great buy and hold deals, and there are poor syndication deals, and vice versa. They are indeed apples and oranges.

However, from the perspective of a passive investor, The choice between strategies still occurs. Like...they gotta choose.

Granted there are a lot of variables affecting outcome of a buy and hold. Rent growth, appreciation rate, capex are all inputs. My goal is to show that regardless of what those inputs are, over the long term...a syndication returning a certain % will still outperform a rental property. Amortization schedules put interest ahead of principle for the 1st third/half of the Investment. And for every dollar that goes towards principal paydown, the overall cash on cash return is lowered. The longer the hold, the more the deal is deleveraged, and that cash on cash return slowly transitions from being high to being low (the appreciation rate itself of around 3-4% nationally).

A syndication earning a consistent 14-20% per year is going to far outpace the buy and hold rental over the long term.

Bruno Araujo · Answer

Maybe 'calculator' was the wrong title for this thread lol.  There is not a reliable way to account for all of these intangibles we're talking about in a 'calculator'.  I think my goal is to create something that opens that discussion for the purpose of talking to investors.

I created a spreadsheet that takes into account the following variables:

Home price, down payment, interest rate, appreciation rate, monthly rent in year 1, rent growth rate, capex/expense rate (as a percentage of rent).  Then i calculated what the 'total equity' was at the end of each year for 30 years which included the principal paydown equity gain, the market appreciation equity gain, and finally the cash flow based on the rent vs debt/expenses.  This is based in part on the amortization schedule using the inputs listed above.

Then I compared the end of year equity position each year for the rental and plotted it on a graph comparing it to a syndication earning around a 16.1% IRR.  All the inputs for the rental can be changed, and it's interesting to see how the different inputs change the graph.  For example how much leverage the rental deal used is a huge factor in the graph comparison, how much the rents grow at is a marginal factor, etc.

When syndications are pitched, there's a projected IRR.  People also come to this website and run numbers for a particular deal using the rental calculator.  I believe there is value in running that calculator for an 'average' deal (whatever that looks like depending on the investor/market) and comparing it with the projected returns from a syndication IRR.  That is something an investor can look at, and then add all the intangibles on top of it.  Like is this worth my time? Do I have the experience to make this rental work?  Do I have the risk tolerance to see this out?

That movie scene was very interesting.

Bill F. · Answer

@Bruno Araujo If it takes you a week to make that model you probably need to spend that week taking a course to get better at excel. What you want o make is really JV.

If you pirate someone else's model you'll spend just as much time figuring out their thought process and adapting it to your needs as you would have making your own.

Also what do you define as long term? 5yrs, 10 yrs, 25yrs? Any decisions made off a model projecting 10+yrs into the future will be sub optimal.

It seems like you want to use this as a sales tool, but are stepping over dollars to pick up nickels. Your pitch centers around the time involved in making returns in the rental space, the the returns themselves.

Theo Hicks · Answer

Hi @Bruno Araujo.

What is the goal of this spreadsheet? To determine which strategy nets better long-term returns? If so, as others have said, it depends on the individual. I can make more money as a passive investor compared to any active strategy if I don't know what I am doing. Or I can lose all of my money if I invest with the wrong sponsor or wasn't prepared for a correction.

There are too many variables to account for. The best strategy for you is based on your time commitment, risk tolerance, experience, interests, skills, etc., none of which can be modeled in Excel.

Jon Schwartz · Answer

@Bruno Araujo, if you're building a sales tool to raise capital, I wouldn't make such a complicated spreadsheet. Use nice, round numbers so the math is straightforward and the argument is clear. Maybe compaure a residential rental with a 10% CoC and 3% annual appreciation to a syndication that has a four-year hold and a 15% IRR. What's that look like after 20 years, including taxes?

Luke Miller · Answer

@Bruno Araujo it's not comparing apples to apples. Residential is a different animal than commercial. If you're trying to create something for a passive investor to look at and make their decision, how are you going to talk about the intangibles (being a landlord instead of a passive, different tax benefits, budgeting for cap ex, hiring/firing staff, etc...)Usually, when I talk to a passive investor, I tell them that with a syndication they can get returns that are close to a SFH investment, but it's a whole lot more passive. Not to mention better tax benefits (cost seg., bonus depreciation, etc.)

I've found that the intangibles are more powerful than the returns.