All Forum Posts by: Dave Vona

@Mike H. thanks for sharing, and congratulations on a very successful ~15 years of real estate investing. I agree if you can purchase properties at 70-75% ARV, that is going to provide a much better IRR than passive investing in MFH syndications.

The IRR takes into account all of the cash flows and the profit when you exit the property. It assumes that the cash flows are invested at the same rate as the IRR, which is not always the case, but it is one of the metrics used when assessing a syndication. You can see in my 80% BRRRR columns that the IRR does go way up because you would only leave a small amount of capital in the property. At a 75% LTV refinance, you're only leaving 5% of ARV invested in the property is purchased at 80% ARV.

I only ran the analysis down to 80% ARV because the investing environment has changed so much. The price-to-rent ratio has gone from a nation-wide average of 92 (in 2012) to 134 (in 2024). This affects whether a property will cash flow. The mortgage interest rates have gone from ~3-4% to 7%. And there are millions of more investors competing for the same deals. It seems that finding properties at a 25%+ discount rate, that can also at least breakeven on cash flow, has been become nearly impossible in most markets, unless it is a very rough neighborhood.

I'm just not sure I can find these types of deals in 2024.  So I wanted to compare what seems realistic in this environment to the passive returns possible through syndications. 

@Nicholas L. I appreciate your input. Yes, seller financing is another approach to reduce the amount of cash invested, which pushes up the total return (or IRR). I guess I looked at this as more of an advanced strategy. If I can learn to market to out-of-state home owners, I can then see if any are interested in seller financing (or subject-to) type sales.

You commented, "i couldn't be less interested in contributing $X, waiting several years, and hoping i get $X back plus a return on top of that. but YMMV."  Are you referring to a syndication?  There are some multi-family syndications that offer cash-flow prior to the refi or sale of the property at end of the hold period.

Evan, I see what you're saying. I agree, if I was able to get higher rent growth then the SFR IRR would be much higher than the syndication. When doing a BRRRR with an SFR, the rents are increased from the pre-rehab standpoint, but I've already built that rent number into my calculations. After that, I'm usually relying on the market to increase rents. If I can purchase properties in the right neighborhoods, then I could possibly see the higher-than-average rent growth.

@Stuart Udis 

Thanks for breaking down those different buy and hold options. They are very nuanced perspectives that I hadn't really considered. So far, I fall into option #1, trying to BRRRR and not really looking at the neighborhood fundamentals. If I decide to continue with SFRs, and not syndications, I think I need to look more closely at the approach #3 that you describe. As you noted, that will provide the best return compared to other SFR strategies. At some point, when pure cash flow is more important, then looking at a longer buy and hold strategy may make sense.

Thanks for all your feedback. I know my model didn't take into account every factor. It just seems that with all the work and risk involved in finding your own property, managing contractors, and then finding and managing the property manager, the return on the SFR investment should be signifcantly higher than the syndication. The 80% BRRRR scenario was much higher, but those deals not easy to find and implement anymore.

@Randall Alan

I agree that you really need to do your due diligence on the GP prior to investing in a syndication. There are both dishonest operators, as well as incompetent ones, that could lose your entire investment. However, there are also syndicators with a great track records and reputations (Praxis and Ashcroft are a couple operators that I’m aware of).

The reason I did this analysis is because my two SFR rentals are not doing well. I'm losing a lot of money, which I partly blame on my inexperience and partly on my property manager. I feel that inexperience on the investor's part can be a risk in either SFRs or multi-family syndications.

@Ian Ippolito

Thanks for pointing out that syndications have a wider range of IRRs. I haven’t really taken into account risk-adjusted returns. I really like the idea of investing in both SFRs and syndications, if I had enough time and capital to do that.

@Evan Polaski

My SFR model did include a 2% annual growth for expenses and for rent. And even with increasing rents each yearr (and appreciation), the IRR trends downward.

Hi, I'm trying to decide whether I continue to actively invest in single-family (or small multifamily) long-term rentals or invest with a multifamily syndication. I decided to run IRR (Internal Rate of Return) calculations for the SFR (single-family residence) investing in order compare with the IRR targets I see proposed by syndication operators.

The target rate I often see on syndication sites is around 15-18% IRR (and sometimes higher for new development projects). This includes some amount of cash flow and then a larger payout once the property is sold or refinanced after X number of years. My intention was to see how this rate compared to the IRR of a SFR investment using several property assumptions and different purchase models.

Based on my calculation, I was surprised to find that the IRR on a SFR was not as high as I expected, especially if held for the longer-term.

I realize there is more to an investment than just the return. Most investors will also take into consideration risk, time invested, control over the asset, the ability to do a cash-out refinance, and other factors. However, I wanted to focus on just IRR for this analysis.

Please note, I did not include the tax benefits from deprecation. From my understanding the 15-18% IRR promoted by syndicators generally does not include these tax benefits either, so it is still a fair comparison.

Assumptions
I had to make a few assumptions about the property and mortgage interest rate:
Property value = $180,000
Rent = $1680
Mortgage Interest Rate = 6%

I also made assumptions related to other costs such insurance, taxes, property management, maintenance, capital expenses and vacancy. Both rent and expense growth was set at 2%. For simplicity, I did not include closing costs or loan points in the purchase price numbers, but did include a fee of 10% of the sale price to cover closing costs, commissions, and minor repairs.

Models
Below are two tables showing the IRR for the traditional rental, using a 20% down payment, and the BRRRR models using a 75% LTV loan. My models only go down to 80% market value (i.e. a 20% discount) since this seems like a reasonable goal for the "average" investor in 2024. I compared a 2.5% and 5% property appreciation rate at 5-, 10-, 15- and 20-year intervals. The IRR is assuming there was an initial investment amount, some cash flow each year, and then a sale of the property in the year indicated.

Traditional SFR rental using 20% down

BRRRR using 75% LTV loan

Observations:

1. In nearly every case, the IRR continues to decrease the longer the property is held even though the cash flow is increasing. This is because the earlier years see a large jump in IRR due to the leverage used, however this effect diminishes in later years.

2. After 20 years, the 5% appreciation rate use-cases only make a difference of roughly 2-2.5% in the IRR.

3. After 20 years, only the 80% BRRRR use-cases offer greater than a 20% IRR.

Questions

1. Is it worth investing in SFRs for a part-time, non-professional investor? Unless you're able to consistently purchase properties at a 20% or more discount using the BRRRR strategy, the longer-term IRR is going to be under 20%. A consistently higher appreciation can make up for a lower purchase price discount, but 5%+ appreciation for 5-10 years is typically not the case in markets that offer some amount of cash flow.

2. If you do invest in SFRs, is it better to hold the properties for a shorter period (less than 10 years) to increase your IRR?

3. If the IRR is not greater than 20-25%, which applies to most of the above models over the long-term, are you better off investing in a syndication which is much more passive than buying and managing a portfolio of SFRs?

Please let me know your thoughts on my analysis and any comments you have on the SFR vs syndication investing questions. Thank you.

That's great.  I'd also like to add a couple more rentals in Omaha in the next year.  I always find it challenging to find contractors that are competent and have reasonable pricing, I'm continuing to search.

Hi Brandon, I have two rentals in Omaha at this point.  The first was purchased in 2021, and then another in 2023.  I benefited from little from appreciation on the 2021 purchase.  I think I moved too slow, although I was using that time to flip properties in Denver to build up additional capital.  

Do you invest in Virginia? 

I know how disappointing that can be, I recently had a SFH appraisal come in low after the rehab.

One of the comps used by the appraiser was my property that I purchased 4 months earlier.  However, the comp was not adjusted to account for the minor rehab that I performed.  I worked with the bank and they sent the appraiser an itemized list of the work that was done.  

In the end, this increased my appraisal by $10K, or roughly 5%.  It was still ~$20K below what I had hoped for, but I had to accept it and complete the refinance.  

You may want to provide the appraiser your SOW, if you haven't already.  Also, review the appraisers comps to see if they are accurate.  If there are comps that were missed, then sending those to the appraiser could help your case.  

Hi Susan, I've had inspections done on the rental properties that I've purchased.  I then go through the inspection report and make a list of any repairs I want to have done during the rehab.  And, I can see what maintenacne/repairs may be needed in the years ahead.  

A GC can sometimes provide some of this feedback, but I wouldn't trust them to create a scope for me.  I like to create the SOW and give that to the contractor, rather than the other way around.