Since we each began our real estate journey with single-family homes, we can testify that to successfully manage and be a profitable investor in these types of investments, you’re required to invest much more time and energy than one would expect.
Investing in residential rental real estate can be challenging because, typically, you as the (often sole) active investor shoulder multifaceted responsibilities throughout the seemingly never-ending process. Just a few of the many hats you’re required to wear include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up, for every property you own. With any imagination, I’m sure you can quickly extrapolate how quickly this could accidentally turn into a full time job.
Unfortunately, most of us aren’t looking to create another job for ourselves and would prefer to earn additional cash with little ongoing effort required (also known as ‘mailbox money’).
Why Single Family and Small Multifamily Rental Investments Can Lack Efficiency
After pondering on the single family home conundrum for a few minutes, the inefficiency of owning single-family rentals may become clear. So, it makes sense to consider small multi-unit properties, right?
Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each.
But, even with a property manager on board to help with your rentals, you still carry full responsibility for bookkeeping, strategic decisions, and maintenance/repair costs. Actively managing any rental properties can usurp ALL your free time and more. Even if you were interested in dedicating a few hours a week to a side hustle, actively managing rental properties requires more than that.
Why Passive Real Estate Syndications Caught (and Held) Our Attention
Alternatively, and unbeknownst to most, there exist fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s (Tenants, Toilets, and Termites. Oh my!), much less any of the other headaches that can accompany small rentals.
According to Forbes, once investors become aware of passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
- Minimal Time Required
Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living the life you want, instead of one you’ve settled for.
- Opportunity for Diversification
It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to various markets across the United States.
By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes with confidence that professionals with targeted expertise are appropriately handling the investment every step of the way. This allows you to quickly and effortlessly scale your portfolio while also mitigating risk.
- Did You Say Tax Benefits?
Similar to personally owned rental properties, you get pass-through tax benefits when investing in real estate syndications. Because of the advantages provided through accelerated depreciation, it will seem like you’re earning tax-free passive income throughout the holding period. Now, that’s a home run…more income and lower taxes!
You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA for guidance in this arena.)
- Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you invested $50,000, your most significant risk would be losing that $50,000. As a limited partner, you can’t be held liable for an amount greater than your investment and all your other assets are protected.
- Positive Impact
With small rental property investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal, which is exhilarating.
Most syndications’ business plans contain an element of property improvement, also called value-add) and, when done properly, those renovations create a cleaner, safer, and nicer place for people to live and positively impacts the community and the environment. That kind of widespread positive impact is simply impossible if all your investments are in stocks and mutual funds.
Are Residential Rentals or Commercial Syndications Right For You?
If you’re struggling to decide between active and passive real estate investments, we can tell you from first-hand experience that the lessons you’ll learn from owning small rentals are irreplaceable. However, those lessons have no bearing on how successful you will or won’t be as an investor in commercial real estate syndications.
To put it simply, personally owning rental properties is not a prerequisite to becoming a successful syndication investor.
All in all, investing in real estate is a great way to accelerate retirement and generate more cash flow along the way (plus diversify and mitigate risk). In addition, it allows you to positively impact the families who will live in your units and a positive impact on the environment and community.
As a busy professional who’s already feeling stretched between your career’s requirements and your family’s needs, plus the pressure of saving for later while affording life now, you don’t have time to waste on side hustles, volatility, or time-intensive rentals.
This is why, here at Growability Equity, we’re focused on collectively implementing our experiences from the corporate world, owning small rentals, investing passively in syndications, and even sponsoring a few multifamily deals of our own to provide you the best, most efficient, easiest path toward passive income and financial freedom.
I would like to know historical performance metrics
Gregg, we have not seen any 3rd party data that has compared historical performance of single-family vs passive multifamily rentals. However, here is one article that cites an academic study that states historical average total annual returns for residential rentals is 8.5%:
From our own experience having invested in a few dozen passive multifamily investments and having had conversations with dozens of other multifamily owners, the returns are typically trending at a total annual return of around 15%. Here are a few other considerations:
– There are some single family rentals that do much better than apartment syndications and many that don’t do nearly as well. A big driver of the variability comes down to the owner/operator. Most rentals are owned by individual investors (not professionals as with syndications) who manage the assets on the side, which typically leads to variable and lower performance for single family rentals.
– Part of the decision of single family vs passive apartment investing is about the level of control and involvement desired by the investor. A single family operator who wants control/involvment may be able to achieve typical passive apartment returns if they are trained/skilled and can focus on the management of their properties (difficult for part-time operators who have another job). A big tradeoff here, however, is that it is much harder to scale single family rentals from a financing and property management perspective, which tends to limit the upside.
– Passive apartment investing is best suited to those investors who don’t have the interest, or time to manage real estate but want double-digit, total annual returns with low variability, strong tax benefits, and the comfort of knowing they have experienced operators managing their apartment investment.
Gregg, thanks for your question. Let us know if we can be of further assistance.