One question that comes up most often is, which investment provides a better return? People want to know if investing in real estate properties is more lucrative or if real estate syndications are truly the best choice.
Real estate syndications’ major benefit is being a true hands-off investment, as it saves investors from the stress of maintenance issues, tenant complaints, and dipping cash flow. That right there can make you feel like syndications are a better deal (who wouldn’t want to avoid that stress!?).
On the other hand, with rental properties, you have to do all the legwork. That includes finding a broker and a property manager and coordinating with lenders. So, in exchange for all that hard work, you’d expect better returns, right?
Thankfully, over time, I’ve developed a portfolio containing both types of investments, so I’m able to honestly answer this question. I spent four decades building a single family and 2 to 4 unit rental portfolio and that portfolio did very well for me. Being a full-time real estate professional made it easier for me to manage all of those rentals – much easier than it would be for a busy professional with a demanding W2 job. Real estate investing has provided me financial freedom and an excellent work life balance. It can do the same for you. Even with my success in self-managing my own single family rentals, I have shifted most of my equity into larger multifamily properties both as a passive investor and as an active general partner.
Why did I make this shift?
Greater cash flow and less day to day management responsibility are two key reasons why. There are others which I will cover in subsequent blog articles.
Check out some of the numbers below.
Real Estate Syndication
First let’s review what a $50,000 real estate syndication deal would look like cashflow-wise, just so we have a comparable reference.
If I were to invest $50,000 into a real estate syndication with an 8% return, that equates about $333 per month in cash flow.
$50,000 x 8%= $4,000 / 12 months = $333
If I could make $333 per month with a 50K investment in a real estate syndication, then a real estate rental that requires sweat equity would need to provide me more than $333 each month (or 8% return) in order to be worth it overall.
Invest $50,000 and receive 8% cash flow (cash on cash return) $333 a month or $4,000 a year, with no landlord tenant hassles.
That’s not bad and of course, the value of the asset should be increasing as well.
Rental Real Estate
Now, let’s have a look at one of my rental properties.
A great example to work from is my four-plex in Greer, South Carolina that cost $255,000 at the time of purchase. The four plex was a total fixer upper and I spent close to $40,000 a unit to totally renovate and upgrade the units. This was a down to the studs renovation – new roof, windows, plumbing, HVAC, and electrical systems, new kitchens, updated baths, refinished floors, and complete new interior paint. My total investment to date is $255,000 plus $160,000 ($40,000 x 4) or $415,000 in total. The renovations took 6 months to complete so there was no rental income during that period.
Here are the numbers at the present time:
Cash invested is $415,000 less $285,000 so I have $130,000 cash invested in the property.
Units are rented at $950 a month each.
My net monthly income (my cash flow) after paying all operational expenses, vacancy & credit loss, loan payment, property taxes and insurance is on average about $800 a month.
$800 a month cash flow equals $9,600 a year in cash flow. Not bad either.
But what’s the return on my capital invested?
$9,600 a year cash flow divided by $130,000 capital invested produces a 7.3% cash on cash return. And the 7.3% return does not include the six months down time during renovations where no income came in.
I am confident this will prove to be a good investment over time but will require more of my time and personal attention.
So, Which is Better?
In this example, the syndication investment provided a slightly higher return than the fourplex I own individually.
Individual ownership of rental properties does demand more hands on activity by the investor and also have greater monthly ebbs and flows in cash flow. Tenants come and go and maintenance expenses are unpredictable. If you’re really interested in consistent cash flow in exchange for minimal work, rental properties aren’t going to be your cup of tea.
Rental properties might be for you if you really want a hands-on investment and if you’re okay with having some tough months in exchange for those with positive cashflow. You’ll just have to do everything in your power to ensure most of the months are positive to make it “worth it” long term.
There’s no right answer for everyone. As you can see, I still invest in both types of properties. There’s value in both.
Rental real estate does have a potential for greater income – if the stars align and you have a fully occupied property with low maintenance costs and tenants that pay rent. There’s no such thing as a maintenance-free property though, and to boost rental rates, you’ll want to do some improvements here and there.
For a no-fuss investment with consistent cashflow, then a real estate syndication might be your best bet.
Nice article. For me, I am more comfortable investing in my own rental properties if they are local. I understand the local market better and can more easily manage the investment. Passive investing in a syndication expands my opportunity for properties not in my local market. If I trust the operator, their familiarity with the market, and their ability to manage the property, then I do not need to be local. I agree with Arn that there is value in both types of investments.