I know this has been asked in the past. I've read through those posts and am looking to update the discussion based on current market conditions and get some advice based on our specific circumstances listed below.
We are looking to diversify our stock-heavy portfolio into more passive, cash-flowing real estate and are analyzing our options. Our current real estate holdings consist of a few large-scale class B value-add apartment syndications in markets around growing major metro areas (with a very experienced sponsor), as well as a couple class C turnkey single-family rentals in the Midwest. We're looking at buying more of one or both of these asset classes and want some help comparing the two.
Some more background: we are accredited investors who are busy professionals and don't have time (right now) to learn how to find, and manage our own rental units without the help of a third party like a syndicator or turnkey provider. All else being equal, we prefer a more passive approach, but we realize some "work" is necessary for any investment, at least upfront. Rental properties in our local market are overinflated and the numbers do not make sense as long-term rentals from a cashflow perspective, which is why we are looking at investing out of our local area. We budget well and are ok with the irregular cashflow from the apartment syndications.
Here are some of the pros and cons of each option that we've identified so far. We'd love to hear others' thoughts on the risk/reward profile of each and anything we haven't yet considered:
Value-Add Apartment Syndications
PROS
- Higher return potential (most pro-formas I've read aim for 13-18% IRR over the life of the investment) due to value-add component
- Specific market and asset risk is short-term (most funds aim to sell properties in 3-7 years, after value-add is complete)
- Can fairly easily spread risk across multiple assets and markets using a syndication fund
- Investment opportunities (at least at the moment) seem to be readily available from many different syndicators
- Portfolio risk from individual unit vacancy is minimal (although nationwide eviction moratoriums and neighborhood/regional factors can still present a risk)
- No impact to personal credit. Leverage is baked into the investment at the GP level
- No decisions to make once investment is made (until the assets are sold and you need to find another investment)
CONS
- No control over investment
- Illiquid
- Some syndications have high initial investment requirements
- Short-term nature of investment requires identifying new investments as assets are sold
- Risk/return is more reliant on competence of syndicator - more due diligence needed upfront to vet them
QUESTIONS
- What unique risks are there with the value-add apartment syndication model that go along with the higher returns? How to mitigate those risks?
- What is the long-term outlook on value-add apartment investing? Are current IRR numbers sustainable over the long run? Is the "value-add" component creating a more speculative component that could be riskier if the market shifts?
Turnkey Single-Family Rentals
PROS
- Medium return potential (seems to max out at 7-10% CoC currently, using leverage)
- Full control over investment
Long-term investment - most of the "work" is front-loaded. With good property management in place, it can be fairly hands-off after that - More liquid than syndication investments - at least as long as there is a market for the property. Caveat is that turnkeys sell for the high-end of market value, so disposal in the first few years will likely lose money
CONS
- Specific market and asset risk is long-term (per property - mitigate by diversifying across different markets and property types)
- Spreading risk across multiple assets and markets requires multiple investments and quite a bit of due diligence
- Turnkey properties (along with most other single-family homes) are becoming harder to acquire and thus more expensive, compressing returns and making it harder to find properties to buy with solid cashflow
- Portfolio risk from individual units is high (until sufficient number of doors achieved to mitigate this risk)
- Using leverage requires qualifying with personal credit - may become harder/more expensive with recently-announced changes at Fannie May
- Requires some effort (to "manage the property manager") and decisions required at some point for capital expenditures
QUESTIONS
- What unique risks are there with the turnkey single-family rental model? How to mitigate those risks?
- What is the long-term outlook on class B/C turnkey rental investing? Will CoC numbers continue to compress or will they level out/rise over the long run?
Overall, we are leaning more towards adding more value-add apartment syndication investments, mainly due to the higher return potential, more plentiful opportunities and lower barriers to entry at present, as long as we feel comfortable selecting a competent syndicator. We'd like to know if there are factors we are not yet considering in the above analysis and if there other options we should be looking at for real estate exposure in a mostly "hands-off" fashion. Is there a higher risk of loss of capital in one of these two options? Are there any different tax benefits to holding one or the other?
