LP syndication vs buy-it-yourself multi-family IRR

[Chan Le]

I'm torn between buying a few medium-sized multi family every year or just put my extra $$$ into syndications as Limited Partner. I guess LP in syndication will surely bring lower return than buy-it-myself, but how much of a difference in IRR are we talking about? 50% lower? My estimation:

- for LP in syndications, 20% target IRR (x2 capital in 5y) is the "industry standard" for the last few years, it looks like we are moving towards 15% target IRR for the recent deals I have seen, but no work needed is a really sweet deal to have.

- for people who buy it themselves, I estimate an average 7-cap can brings in ~30% IRR after 5 years assuming 5% annual property value increase and expenses at 50% gross rent.

Beside return, can an average out-of-state investor reliably get a few 7-cap deals every year from a good market without much marketing (using a commercial real estate agent for example)? Is such return too optimistic?

[Arn Cenedella]

@Chan Le

This is an excellent question.

There are pros and cons to either approach.

It seems to me that the first question is: Do you want to be an active or passive investor? The answer to that question in large part determines your investing approach.

Another way to phrase the question is: What is your time worth to you?

Doing it yourself may yield higher returns if you do it right. DIY also allows you greater control and the ability to use 1031s to increase your net worth. 1031s in syndication deals are possible but much harder to find. DIY may allow you to move more quickly in reaction to market conditions.

Syndication deals provide economies of scale that help offset the typical 30% GP share. Property management and repair costs on a per unit basis decrease with the size of the property. The larger the loan typically the more attractive the financing terms. The difference between a typical commercial loan with a 20 year amortization and an agency loan with a few years of interest only is huge. 

There is a reason for “specialization of labor”. As a DIY what level of asset management skill can one bring to the table versus someone who does it full time?

As an aside, 7 cap deals are difficult to find in any kind of decent market. A 7 cap deal on paper would indicate a problem property in a problematic area to me.

All this being said, I think there is room for both approaches.

Having over 40 years investing experience in the single family space, I have moved my portfolio into multifamily both passively and actively. I have 7 LP and 2 co-GP multifamily investments and I am happy with the diversification provided by all of these investments. I still own numerous SFR rentals too.

The answer to you question is 1) partially of function of the financial numbers and 2) how you value your time and 3) your particular skills and abilities and 4) capital available to deploy.

One size does not fit all. You are asking the right questions.