Active investment vs. Passive Investment: Side by Side Comparison

[Rick Martin]

I, like many, started out in single-family and small multifamily rentals. I enjoyed it, put a lot of sweat equity into it, and did pretty well over the years. I got wind of larger multifamily and thought it seemed more scalable, so I looked into buying smaller apartments and then got involved in syndication. It took a while to break into syndication, and as I grew impatient, I decided why not invest passively into syndications and earn while I learn. The projected return looked good for it being a passive investment and compared favorably when I considered that I didn’t have to do anything. The loss of control was strange, I will admit. When you look at the final numbers side by side, you can see they are very similar. What the numbers don’t tell you is, in our rentals, we had our a/c units stolen twice, and a tenant whom we had to evict threatened my partner’s life. I partnered on these two rentals in Palm Desert, California, so cash flow was okay, but appreciation was good.

All deals are different. Of course, you can do better or worse than the deals below, but I thought it was a fair comparison. They were all-cash deals. Next, I would like to take a 4 unit that I BRRR'd and compare it to an apartment syndication, where there is a return of capital in year three. Both scenarios return your capital, so you have much less money in the deal.

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Palm Desert Rentals 4-yr hold

Total Proceeds (cash flow and sales proceeds): $166,804 

Total Costs: $88,725

Profit $78,079

• 88% total return

• 1.88 Equity multiple

• 22% Average Annual Return

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DFW Syndication 5-yr hold

Total Proceeds (profit plus return of equity): $209,560

Total Costs (minimum investment) $100,000

Profit $109,560

• 110% Total Return

• 2.1% Equity Multiple

• 21.9% Average Annual Return

[Kyle J.]

@Rick Martin Very interesting post. Like you, I also started with rentals and then gravitated towards more passive investing (private lending). I still have my rentals though and foresee doing both (at least for a while) because they each have their pros and cons. 

The rentals are definitely more active and honestly can sometimes be a headache, but I get so many benefits (e.g. cash flow, appreciation, tax benefits, etc). 

With the private lending, you basically just have the monthly cash flow (interest payments) for a benefit, but I like how extremely passive it is. 

I’m curious...your average annual returns are nearly identical between the two different scenarios, but the rental scenario obviously requires much more work/time/headache to obtain those returns. So do you see yourself possibly gravitating more towards passive investing (like syndication) in the future? Or continuing to do a mix of both?