Hi Marty! I would suggest no matter what option you go with, you need to look for locations that have good fundamentals. (e.g., locations that have high population growth, high job growth, low cost of living I feel it is also very important to invest in locations that are landlord friendly (meaning it is easy to evict). I have invested in both landlord friendly and tenant friendly and I would never invest again in a tenant friendly state because tenants can live for free for extended periods of time.
There are many differences between the 3 options you mentioned. Not just from a time perspective, but also from a risk perspective. Even if you decide to invest in just one type of asset, I would highly recommend you split your funds up into more than one investment because no matter how good a deal looks, things can happen.
Buy & Hold
I am thinking you are mostly referring to purchasing smaller properties on your own. But, buy & hold can apply to you purchasing smaller properties on your own, or you being part of a larger purchase through group purchasing/syndication or crowdfunding such as Realtyshares.
There is not necessarily anything wrong with buy & hold. The advantage to buying & holding smaller properties is you have control over the asset. For example, you decide when you refi, sell, etc. When you go through Realty shares or other crowdfunding platforms or through a syndication, you typically have very little control because someone else is responsible for managing the asset. This con is actually also a pro because you can truly become passive.
Buying & holding has a con that your money might be tied up and you might not be able to get it out and invest in other deals. It really depends on how your purchase is structured.
The disadvantage to selling an asset is if you want to reinvest, it can be tough at times to find another investment. So, you have money sitting around ready to invest, but can’t find a good investment. You might have been better off just leaving the money in the asset you already own. There is no one right answer to this question as it depends on many variables such as: Can I refi? Can I get a supplemental loan? Are the market conditions good to consider selling?
I have purchased all types of property sizes ranging from 1 unit up to 346 units and currently own 1,300 units (and close on 454 more this month). In my experience, smaller properties that I was responsible for require much more time than the larger properties I own. If I was a teacher and had summers off, I would much rather not have to work the summers on my own rental properties.
Buying single family homes does not provide the economics of scale for management, material purchases, labor, and does not provide a good way to spread the risk. For example, let’s assume you have 3 rentals and 1 goes vacant or even worse, 2 go vacant. This can significantly hurt your cash flow. Whereas larger properties do provide the economics of scale and helps spread the risk across a larger property. We hire a 3rd party professional management company to run the day-to-day operations, which frees us up to find more deals, and we have a lot less head aches than we did with smaller properties.
Another disadvantage is single family homes are valued based on comps. You have very little control to increase the value of the property. With larger multifamily properties, you are really buying a business and as such they are valued based on Net Operating Income (NOI) and you can significantly increase the value. For example…for every dollar you increase rent or save in expenses, that $1 actually increases the value of the property by $12-$16 (due to the cap rate). This is a concept investors should start realizing because… the increase in NOI is what will help significantly increase the value of the property.
One last point…with single family, it is common that you will have a recourse loan, which means you have personal liability. With multifamily apartments, if you sign on a loan, it is very common that you have non-recourse loans, which means you do not have personal liability (note: you can actually have personal liability though if you do something illegal such as fraud). If you invest in a crowdfunding deal or a syndication, you as the investor have no liability as you are not the one that signs on the loan.
Vacation Rentals
Is likely not the best option for many of the reasons already stated. Also, the fact that vacation rentals are something that people would not rent nearly as much as the economy softens which will happen over time.
Realtyshares
There are many crowdfunding platforms out there. Before you go with one vs. another, you should do your homework and understand what type of fees are involved. I would say one main thing you want to consider is…if you are an investor on a crowdfunding platform, do you have access to the lead deal sponsor? Can you pick up the phone and call them? How easy is it for you to develop a relationship with the lead deal sponsor when you go through a crowdfunding platform. It is also not uncommon for the crowdfunding platforms to take fees. They are not going to do what they do for free….so, they are either going to get the fee from the lead sponsor or from the individual investors. In either case, it typically means there is less money available to the investors.
I personally syndicate multifamily apartments and I also invest as a passive investor with syndicators without going through a crowdfunding platform. I am not suggesting crowdfunding is bad, I am simply stating what I have done. The reason I like investing with a syndicator is that I have direct access to them. If I have a question/concern, I can simply pick up the phone and call them. You have to be careful who you invest with, so make sure you do your homework. I have a number of questions that you should ask a syndicator before you even consider investing with them. If you are interested in the questions, you can email us.
You also mentioned you have approx. $200k to invest. I am not aware of your personal finances, but we find most people actually have more money to invest than they think. There are many ways to get more money to invest, but a couple simple ways to get more money is… borrow against your 401k or 403b. You can borrow up to 50%, up to $50k. So, you borrow at a very low interest rate and make a much higher interest rate by investing in real estate. Check to see if your employer provides “in-service 401k” which provides even more advantages. You could get a line of credit on your own or through a home equity. Again, borrow at a low interest rate and hopefully make much more in real estate. Also, you might have cash value in your life insurance that you can borrow against. Having knowledge and using it is what will help you achieve financial freedom. It does not happen over night like, many people teach. It does take time. But, if you know what you are doing and take action, you can change your life from a financial perspective.
As a side note…I would somewhat disagree with the comment stating there is nothing passive about passive income. I run many deals and I also invest in many multifamily apartments as a passive investor. For me, my passive investments require virtually no time. Yes, I do analyze a deal before I invest, but after I invest, the only thing I really need to do is review monthly reports.
Good luck with your decision. Let us know if we can answer any questions. Happy Investing!
Mark Kenney
