Private Money Lenders VS Syndication Investors

[Ethan Neumann]

I'm newer to multifamily... coming from the SFR space. In the residential space, using private money lenders in the second position is a very common way to fund your entry fee for seller finance or sub-to deal. At first glance, being an LP in syndication seems to be a better passive route than being a PML. The returns seem to be better, there seems to be less risk in apartments than SFRs, and you get to own a part of the asset vs just occupying a lien position on the property.

Am I missing something here? 

[Evan Polaski]

@Ethan Neumann, I think the big thing you are missing is being in a lien position puts you higher in the capital stack over equity/non-lien position.  So be nature a private lender is going to be a lower risk position than any LP position, all else being equal.

How you assess those risks, and the fact that "all else" isn't actually equal does change this calculus, but from a technical stand point lenders (1st or 2nd lien position) hold less risk than equity investors.

Now, I will agree that being a private lender is like buying single family rentals.  You have to actively be looking for new deals, and managing all those payments, that are hopefully coming in.  Mortgage payment = rent payment.  Eviction = foreclosure.  At the end of the day, I prefer LP investing in syndications, because I like the higher returns.  But if a deal goes south, equity is wiped out, and the lenders get the property.