Investing in Small Multifamily versus Syndication Starting out.

2 versus 200- Small Multifamily vs Large Multifamily Real Estate Syndication

One of my First Multifamily assets. Stock image of apartment community

Comparing Returns and Time Commitment: Small Apartment vs. Multifamily Real Estate Syndication. The difference between 100% hands-on or 100% hands-free. Personally, I was up to 30 tenants that I self-managed and have invested passively holding more than 1100 doors. I have done both and still do both. No right answer here, just some observations that might help you with your strategy for getting in and growing your real estate holdings.

Two common options for real estate investors are purchasing/self-managing/land-lording a small 2 or 3 unit apartment building or investing passively in a large value-add multifamily real estate syndication. I hope to clarify the differences in time commitment and potential returns associated with these two investment strategies.

Investing in real estate offers a variety of opportunities, each with its own set of advantages and challenges. Let's point out the common theme: Both active and passive investing are leveraging a tangible brick-and-mortar asset and can provide cash flow and equity growth. And both options offer significant tax advantages. By far the biggest component is your time and what its worth to you. There are opportunities in both currently. I am viewing large apartment opportunities almost monthly, while getting unsolicited offers for my small multifamily buildings, one of which we are considering. The market is strong for rental real estate as rents are up and the barrier for 1st time home buyers remains very high. With high interest rates and higher median home prices the entry point into real estate has its challenges.

Small Apartment Ownership and Self-Management

Time Commitment:

Asset and Market Analysis: To make informed decisions, you'll need to research the local market, understand tenant demographic ages and wages, and stay updated on property values and rental rates. What are you buying into? High growth environment or flat? Is this the good side of town? How are landlords treated by the specific county (tenant-friendly or landlord-friendly)?

Acquisition: When purchasing a small 2 or 3-unit apartment building, the time commitment starts with finding and closing the deal, depending on market conditions and negotiations, this can take several weeks to months, or longer. We still see lots of pressure from multiple offers even in these high interest rates, which is another thing to consider. To cash flow at these interest rates, you will need to add more cash and have less leverage.

Management: Self-managing a small apartment building requires ongoing effort. You'll need to handle tenant turnover in onboarding and vacating, maintenance, repairs, and administrative tasks. Yes, you can outsource this. However, a management company gets a monthly fee, and charges one month's rent for onboarding a tenant. It usually takes a month to re-rent after the tenant vacates, so 2 months rent out of pocket. This eats away at a lot of profit.

Strategy: Buy and Hold or value add? Is the asset just a hold onto an asset that cash flows keeping units clean? Or is there a plan to renovate, grow rents, and force appreciation (an investment property's value is heavily influenced by its Net Operating Income.)

Is there an exit strategy?: We like to have options for selling an asset, and the more the better. I am currently working on a condo conversion taking an apartment building I've had for almost 5 years and creating individual townhomes to sell them off individually which may be worth much more than the whole.

Returns:

Cash Flow: Small apartment buildings can provide steady cash flow if managed well. Rental income minus expenses contributes to your monthly cash flow. The asset cash flows should be more straightforward considering its only 2 or 3 units. But Vacancies add up as well as tenant turnover and unplanned capital expenses.

Equity Buildup: Over time, your mortgage balance decreases, allowing you to build equity in the property. Renovations can add to the value as well. Recently we have seen valuations run up. This can be a valuable source of wealth accumulation.

Tax Advantages: For no other reason the ability to generate cash flow that has significant tax benefits is a compelling reason to own investment property.

Challenges:

The single biggest challenge in having only a few rentals is that it takes all the rents to be positive cash flow. One bad tenant with slow or no pay is very painful as you get to pay their way. Depending on where you live an eviction can take upwards of a year. Imagine housing someone for a year without rent, and paying the utilities. This is not for everyone. It's less painful as you add more units and cash flow regardless of a bad tenant. The other challenge is to scale or grow as the biggest challenge is your limit with time.

If this is your path get a knowledgeable realtor/broker who is also active in multifamily to assist with market detail and visibility to deals. In my market, I have walked through/ evaluated every 3-unit or 4-unit building that has been on the market in the last 5 years. A good real estate attorney and financing pre-approval will also be helpful if you are not an all-cash buyer.

Multifamily Real Estate Syndication

Time Commitment:

Investment Asset: Here access is key. The SEC has made joining a Syndication a relationship-based product. All Syndications or Private Placements are regulated by the SEC and they created rules to protect the individual investor. The operator must have defined pre-existing relationships with their investors. Like any investment, there is work on the front-end before participating. This front-end work to determine if multifamily real estate syndication fits your risk tolerance and return strategy is important. It may involve attending investor meetings and webinars, or connecting to groups like Broker-Dealers that are viewing and providing due diligence on these projects.

Due Diligence: Investors should perform due diligence to understand what they are investing in and why. To ensure the syndication aligns with their goals and risk tolerance. Here are some of the considerations for real estate syndications.

• Operator- The group or team that will acquire the asset, manage all aspects of tenant and property management and project renovation, as well as providing returns to investors and potential sale of the asset.
• Market- Why this particular market? Operators target markets with strong Job growth and population growth or In-migration. Class A or B market and demographics of tenant population.
• Asset- Why this asset? Why is it selling? How does it compare in the market? Most operators target underperforming assets (not failing assets) with below-market rents in a great neighborhood. Operators will call these “Classic” meaning unrenovated.
• Strategy- Buy and hold or Value add? Is it already cash-flowing? What renovations are planned? Class A,B, or C asset?

Of the above I would put an exclamation point after the operator's track record. What experience do they have? Do they own and operate assets in the market already or is it their first? How many projects have gone full cycle (acquisition to exit) with what returns to investors? Due Diligence should also include a background check on the organization and its leaders. How long your funds be tied up for what return and cash flow are important. The PPM (Private Placement Memorandum) which is submitted to the SEC for completeness is the guiding document for the entire strategy for investors. What is the projected hold period and what are the target returns? Due diligence involves reviewing financials at acquisition as well as the proforma, or post-renovation estimates. Reviewing the market analysis to understand the growth in rent created by unit renovation.

Passive Ownership: As an investor in a syndication, think of it as leveraging the expertise of the operator by joining your investment with their strengths to provide an outsized return. The syndicator handles property management, renovations, and operations, all aspects of the project. They provide you with quarterly communications with progress and performance metrics.

Returns

Cash Flow: Before you decide to invest in a syndication the operator will outline target investor returns along with anticipated hold time of the asset. Example options include a fixed annual percentage paid monthly or quarterly. Or an option that would include both and debt portion paid monthly and an equity portion paid at the sale of the asset.

Potential for Appreciation or Equity: Value-add strategies target properties with potential for appreciation through renovations and improvements. Net operating income is derived from both income and expense so growing income in rents and reducing costs associated with ongoing expenses increase the NOI. NOI is a big contributor to the valuation of the asset. In regards to appreciation, the operator really makes their money on the sale of the asset in most instances. They get a small acquisition fee and a small management fee, but their real incentive is to meet the objectives of selling/ refinancing the asset at the target returns.

Exit Strategy: A real estate syndication will have a planned exit strategy before the acquisition takes place. The PPM outlines the entire plan all the way to the exit. When the objectives are met in the plan and the asset has forced appreciation the operator will look to close the project and sell the asset or refinance, (payout investors) and keep adding their Assets Under Management.

Risk Diversification: Investing in a syndication allows you to diversify your risk by pooling resources with other investors, spreading risk across multiple units. As an investor, your only risk is the amount of capital invested. Large apartments are considered rent-stabilized at a certain % of rent close to 85%, after that they are cash-flowing.

The core advantages of passive investing in a real estate syndication are diversification and scale. You can easily diversify into different markets, operators, asset types (industrial, Multifamily, self-storage), and even single asset vs a Fund. The other advantage is that you can easily add more investments scaling your holdings with little impact to your time. Here I would also mention the ability to compound your equity. For example at the sale of the asset you are given your equity multiple and a chance to reinvest. So if you doubled your investment and reinvested that you would be compounding your equity with each full cycle and in some instances this could be 24-48 months.

Conclusion

In summary, the choice between buying and self-managing a small apartment building and investing in a multifamily real estate syndication depends on your goals, risk tolerance, and available time. Small apartment ownership is more hands-on but also provides the potential for steady cash flow and equity buildup. In contrast, multifamily syndications offer a more passive approach with the potential for higher returns and risk diversification. From my perspective, it is much easier to scale in Syndications than in smaller multifamily. My current personal challenge lies in unwinding my small multifamily efficiently and moving that into large hands-free syndications.

My real estate journey led me into multifamily investing when I bought my 1st 3-unit building. My efforts stalled at 30 units with time limitations, I pivoted to large apartment syndication investing and ultimately became part of a broker-dealer group providing investors with a pre-screened window into a dozen or so investment offerings each year. We are an extension of the operator's team to bring their project to the investor market. We provide 3rd party financial analysis, due diligence, and a physical site visit prior to sharing these offerings with investors. Should you want to see these offerings for yourself reach out.