Honest Question about alternative strategies

[Edward Parker Parker]

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

[Ian Ippolito]

Quote from @Bruce Lynn:

#1.  Typically you will need to be an accredited investor to invest in syndications, so need to have significant net worth.

#2.  Deals very tough to get done right now....fairly big gap between what sellers want/need and what buyers/lenders willing to pay.

#3. Your numbers might be off for most deals today with higher taxes, higher interest rates and less leverage. I think most of the deals I'm seeing now are pitching more like 15% IRR.

#4.  Capital raises seem to be pretty tough today for many great operators....so you may commit and send in your money and they sit on it for 6 months until the deal happens, or they send it back to you (hopefully) if it doesn't happen.   So your best laid plans for returns go to zero.

 I invest in both direct real estate (via residential rentals) and syndication/crowdfunding passive investments. In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both.

Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

The flipside of having the power to control everything is that can be alot of work (and a full-time job if you are putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

The downside is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

Good luck with your search.