Active Real Estate Investing vs. Syndicated Passive Investing

Do it Yourself Real Estate Investing vs. Syndicated Group Real Estate Fund Investing

In this article, I’m going to outline the pros and cons of different types of real estate investing. I’ve been investing in real estate since 2014. I started out with a single house that I lived in and later flipped. Since then, I’ve bought, sold, and held several commercial properties. Recently, with a couple of partners, I started a real estate investment fund that’s on track to have $20,000,000.00 of assets under management by the end of the first quarter of 2020.

Real estate investing is one of the most rewarding and exciting types of investing you can partake in. There are plenty of ways you can invest in real estate; you can buy rentals or flip houses yourself, you can invest in Real Estate Investment Trusts (REITs), or you might want to invest in privately syndicated real estate deals, just to name a few. There’s not a wrong answer to real estate investing, picking the right type of investment has a lot to do with where you are in your career and life at the time.

Pros and Cons of Do It Yourself (Active) Real Estate Investing

The pros to active real estate investing:

• · Higher ROI
  • You don’t share your profits with anyone.
• Often, the more time and effort you put into your investing strategy, the bigger the payoff.
• · Control
  • You have complete control of the property.
• · Tax Benefits
  • As an individual investor you are afforded several tax benefits, that can be easier to take advantage of as an individual.
• · Cash Flow
  • Typically, you’ll see cashflow each month from a rental property.
• · Analysis
  • Active investing allows you to analyze deals and set your own criteria to match your risk profile. You might have a higher risk tolerance than a REIT or Syndicator, which could lead to a bigger payoff in the end.

Now, let’s touch on the cons of DIY investing:

• · Higher Risk
  • You don’t share risk amongst a larger group of people.
• · Large Amount of Time Involved / Management
  • Time involved managing real estate investments can be costly. Answering Tenant phone calls and dealing with everyday issues of managing real estate may take an investor’s attention from their primary source of income.
• The time involved in researching and analyzing deals is significant.
• Filling vacant space can be challenging.
• · Illiquid
  • Real Estate is not a liquid. If you want to cash out, you will have to sell the property.

Pros and Cons of Syndicated Real Estate Investing

The pros to investing with a group in a Syndicated Real Estate Fund:

• · Passive Investment
  • Your involvement is limited to collecting your quarterly payment from the investment company.
• · Lower Risk
  • Your risk is spread amongst multiple properties and a larger group of people.
• · No Personal Liability on Debt
  • Some Real Estate Funds will sign personally for the debt on the property.
• · Professionally Managed
  • The Real Estate that’s purchased by the fund will be professionally managed by a property management company; these companies have many years of experience managing investments.
• · Tax Benefits
  • Some funds afford several tax benefits, that can be easier to take advantage of.
• · Cash Flow
  • With many investment funds, you’ll receive a quarterly distribution from cash flow.
• · Professional Analysis
  • Investment funds will typically have proprietary analysis models to judge the viability of an investment. These models are complex but provide good.
• · Incentivized Management
  • The managers of a real estate investment fund are likely the last people to get paid from the investment, which translates into the incentive to make sure an asset performs. Investors are often offered a preferred return between 6 – 8%; this means that if the investor doesn’t get paid their full preferred return, the managers don’t get paid.

The Cons of Fund Investing

• · Lower Returns
  • Because an asset that’s held by a real estate investment fund is professionally managed, the income generated is shared among more people.
• · Illiquid
  • Real Estate is not a liquid asset, though most funds will try to work with investors to have positions bought out, in the event someone needs exit the fund.
• · Less Control
  • Participating as a passive investor in a syndicated deal, often eliminates your ability to have a say in the investing activity. The sponsor of the deal normally retains the voting rights. (Note: good syndications will